FATF: Cryptocurrencies continue to be used for terrorism financing

Festung in Syrien. Weiterhin ein Hub der Terrorfinanzierung durch Kryptowährungen. Bild von Marc Veraart via flickr.com. Lizenz: Creative Commons

The Financial Action Task Force (FATF) evaluates how governments implement its recommendations. The result is dismal, and the implementation is sluggish. As a result, cryptocurrencies continue to be used for illegal purposes such as terrorism financing.

In a new report, the Financial Action Task Force (FATF) assesses the state of money laundering and cryptocurrencies.

According to this transnational body, nation-states have made progress in introducing measures against money laundering and terrorism financing. However, many are lagging behind a key FATF measure, the Travel Rule. In many aspects, the past year has seen only „marginal improvements.“ As a result, service providers remain „vulnerable to abuse.“

The FATF is an international working group that develops „recommendations“ for nation-states on how to combat money laundering. It works closely with the G20 and exerts pressure on governments through black and grey lists. It has developed a series of recommendations and guidelines for cryptocurrencies („virtual assets“).

However, implementation is lagging. Of 130 jurisdictions, 97 are only partially or not at all compliant with FATF recommendations. A quarter of governments have not even begun to implement the recommendations. At least a quarter are „mostly compliant.“ There has been no progress in these proportions over the past year.

This was to be expected. The FATF has adopted the same rules that apply to traditional banks, particularly the Travel Rule, which mandates that every electronic transaction must include information about the sender and receiver. These rules are hardly applicable or can only be implemented with significant complications for cryptocurrencies, which is why less than a third of governments enforce and monitor the Travel Rule.

While the industry has „developed a range of tools to comply with the Travel Rule,“ many do not meet FATF standards, and there are issues with interoperability.

Significant challenges are posed by „unhosted wallets,“ the self-managed wallets of users, which are inherently incompatible with the Travel Rule. Therefore, „even among the most regulatory-advanced jurisdictions,“ the vast majority „have not even evaluated what specific risks are associated with self-hosted wallets and P2P transactions.“ Even the countries that are a step ahead merely provide guidelines on how service providers should handle wallets.

Financing Terrorism with Stablecoins – A Win for Counterterrorism?

The result is that cryptocurrencies „continue to be used for financing weapons of mass destruction, as well as by fraudsters, terrorist groups, and other criminal actors.“ North Korea steals and extorts virtual assets, terrorists, especially the Islamic State in Asia and groups in Syria, finance themselves with cryptocurrencies, „often through stablecoins, and they are experimenting with cryptocurrencies with enhanced anonymity.“

This reference to terrorism financing has prompted some media to object. The FATF alleges something without solid evidence, neither through footnotes nor links. Indeed, there is little current public evidence on the use of cryptocurrencies by terrorist groups.

However, the report refers to a briefing by the Counter-Terrorism Committee of the United Nations Security Council on „latest trends in the use of cryptocurrency by terrorist groups and their supporters.“ According to it, the „Syrian Arab Republic“ remains a crypto-hub used by Daesh (Islamic State) and Al-Qaeda; while Daesh in Asia increasingly accepts cryptocurrencies, stablecoins have become the preferred currency, and terrorist groups have improved their „operational security,“ i.e., their privacy.

Nevertheless, the Committee emphasizes that terrorist groups still obtain the majority of their funds through cash, hawala-like networks, and traditional financial institutions. Unlike these, cryptocurrency transactions can be traced and combated. In some ways, it would be progress if more terrorism financing were conducted via crypto.

In fact, stablecoins come almost as a godsend. Even FATF notes: „Stablecoin providers have stated that they can implement risk-reducing measures […] Moreover, some stablecoin providers have the ability to freeze or burn stablecoins via the token’s underlying code.“ Providers often use this ability at the request of law enforcement or to comply with financial sanctions.

If a larger share of terrorism financing occurs through stablecoins, thereby drying up the traditional channels, it would presumably be not a loss but rather a gain for the fight against terrorism financing.