The Perfect Culprit: Is Crypto or the Banking System Funding Terror?

Ever since the crypto trend began gaining traction, institutions have been pointing to these alternative currencies as a major threat to global security. According to these crypto opponents, the anonymity and alternative channels outside traditional finance provided by digital money, enable the worst criminals in the world to fund their work.

From a pure facts point of view, it's difficult to deny cryptocurrencies are used widely by illicit organizations. Terrorist organizations, for example, use cryptocurrency to trade drugs, weapons, and other items on the black market.

Nearly a decade ago, sites such as ‘Fund the Islamic Struggle without Leaving a Trace’ began appearing on the dark web facilitating transfers of bitcoins to jihadis. Even today, the lack of regulation in the cyber domain has opened the door to many criminal and terror organizations to use crypto as a vital source of funding.

This trend is especially true in Asia and the Indo-Pacific where crypto adoption is outpacing government oversight.

But the notion that crypto is the ultimate terror funding tool is not as simple as it seems.

First off, crypto is not immune to oversight and even state-instituted rules. As many researchers have been highlighting for at least the past three years, law enforcement cooperation in cybersecurity domains and cryptocurrency markets has made de-anonymization and tracking of funds real possibilities.

Furthermore, current trends point to the cryptocurrency systems most regulated and integrated into the global system as being the most used and adopted. Platforms that are incompatible are abandoned or remain marginal because of a lack of support, which means terrorist groups and other illicit actors may find that the digital world is catering less and less to their needs.

More fundamentally, however, focusing on crypto as the primary illicit finance problem at the expense of closely monitoring traditional networks can be dangerous for the integrity of global finance.

Recent revelations regarding the Iranian regime have proven just how true this is.

In a recent article, the Wall Street Journal laid out a startling exposé of Iran’s secret financial network used to circumvent American sanctions.

According to official documents and intelligence reports obtained by WSJ, over the past several years, Tehran succeeded in establishing a clandestine banking and finance system to handle tens of billions of dollars in annual trade banned under U.S.-led sanctions.

The implications of these findings are vast, especially in the backdrop of ongoing talks between the United States and Iran in Vienna in an attempt to revive the 2015 Joint Comprehensive Plan of Action (JCPOA) inked by the Obama administration, commonly known as the Iran nuclear deal.

The clandestine web of commerce and finance has allowed Iran to gain substantial leverage in talks with the United States, as the main tool the West has used to influence Iranian behavior has been largely undermined for a long time.

Mainstream reporting on the dismal state of Iran’s currency and its overall economy is reflecting a false reality.

What Iran’s real economic stance is, seems to be vastly different.

According to evidence authenticated by Western diplomats and intelligence officials, Iran built a wide array of proxy companies outside of Iran’s borders in order to hide their connection to the regime, a technique long known to be employed by the Ayatollahs for orchestrating illicit finance.

Through these front corporations, Iran was slowly able to reconstruct its foreign trade and export goods--including Iranian oil. According to the WSJ article, tens of billions in commerce were conducted through these false entities over the past year alone.

What all this means, practically, is that Iran has succeeded in boosting its trade to roughly pre-sanction levels, which has alleviated domestic pressure on the regime, and has also given Tehran more maneuverability on the global stage.

What is important to underscore in this story, is that Iran’s highly successful international plot was pulled off through legacy financial institutions and exploiting holes in the traditional commercial system. Crypto simply did not play a major role, if all, in this scheme.

The lesson from these findings on Iran: there is no silver bullet to circumvent the international system in its entirety. Any major effort to launder large amounts of capital and otherwise conduct illicit finance will have to, at some point, leverage legacy institutions. Focusing on identifying and closing these gaps remains the highest priority in protecting the global finance