Evaluation of Potential Crypto-currency Development Ability in Terrorist Financing

Stable development of traditional financing means.
With the development of the world economy and technology, the ways of terrorist financing are more diversified and complicated. To improve the secrecy of terrorist financing and reduce the risk of financing, terrorist organizations often choose a combination of methods according to the actual development of the region.
As stated previously, state funding is a major source of funds for terrorist organizations. Hezbollah, for example, has been heavily dependent on state funding from Iran, supplemented by income from illegal international activities and charitable donations. During the US sanctions against Iran, the national funds provided by Iran decreased, but during the suspension of sanctions (i.e. after the end of 2018), the funds provided by Iran to Hezbollah recovered, and terrorist organizations can also use other ways to raise funds, such as operating legal businesses, donations from individuals and non-profit organizations, donations from charities, and illegal cultural relics trafficking.
The means of terrorist financing are not unitary but diversified. When these traditional financing methods continue to play an important role in stability and have not been seriously frustrated, the possibility of terrorist organizations financing through cryptocurrency will decline. In particular, when the security of emerging cryptocurrency is in doubt, it is difficult for terrorist organizations to choose cryptocurrency at risk; for example, as countries begin to regulate cryptocurrency more strictly, many places used to engage in cryptocurrency trading have been seriously damaged, which has led to the loss of some users’ funds. For cryptocurrency, once the computer system is attacked and destroyed, the capital will be more vulnerable to loss. In recent years, especially in the early development of Bitcoin, there have been many instances of computer viruses ‘stealing’ bitcoins,
and the users can only bear the consequences of loss themselves.
Attacks on cryptocurrency.
Since cryptocurrency has become valuable, a series of fraudulent transactions, theft, technical attacks, and other events have plagued cryptocurrency, although these security vulnerabilities may be due to technical operation problems, such as funds that are not encrypted and IP address reuse.
The security of cryptocurrency has always been one of the keys to its sustainable development; in the early years of its development, Bitcoin was constantly stolen from the Internet, resulting in great losses. For example, in June 2011, hackers stole the administrator’s rights, which led to the theft of Bitcoin. In August of the same year, My Bitcoin, a commonly used trading center for Bitcoin, announced that it had been attacked, and 78,000 BTC were missing. It is estimated that in 2018, hackers stole approximately $1.7 billion worth of cryptocurrency (Rooney, 2019). Crypto ATMs have also continually come under attack as a possible channel for terrorist financing, and they have attracted the attention of cyber terrorists. In the dark web market, the software Cutlet Maker was sold publicly; this software specifically targets ATM malware. For the country or the international community that is strengthening it financial supervision and meeting the requirements of AML/CTF, deanonymization is a reasonable requirement for the maturation of cryptocurrency.
The loss of anonymization destroys the basic attributes of cryptocurrency. Once cryptocurrency loses anonymity, its advantages over traditional bank currencies are limited. For terrorist organizations, the lack of anonymity will force them to abandon cryptocurrency to finance activities. The overall security of cryptocurrency without a credit guarantee mechanism needs to be improved, which poses a major challenge to the collection and transfer of terrorist funds. If different types of cryptocurrency attacks continue without interruption, the trust of terrorist organizations in cryptocurrency will remain at a low level, and the use of cryptocurrency will be reduced.
Discussion and conclusion
The use of cryptocurrency by terrorist organizations places greater pressure on the international community to fight terrorism financing. The incentive for terrorist organizations to use crypto- currency is largely due to its anonymity and the lack of strict national financial supervision. The reasons for reducing the use of cryptocurrency by terrorist organizations are the price of cryptocurrency and internal development mode, the strengthening of international organizations and national supervision, and constant attacks. In addition, the traditional means of terrorist financing have not been fatally hit, and still function effectively to raise funds for terrorist organizations. Therefore, the use of cryptocurrencies by terrorist organizations is limited.
However, we can foresee that with the development of cryptocurrency technology, especially the improvement of anonymity, it will make it very convenient for terrorist organizations to raise funds. The current evidence shows that the dependence of terrorist organizations on crypto currency is not significant, and the use of cryptocurrency for terrorist financing is still in its early stages, as it is not a mature method of terrorist financing. However, the development of crypto currency technology is un- predictable. Countries and international organizations need to be vigilant, improve their own cryptocurrency regulatory systems, and prevent various ways of terrorist financing through multiple channels. In view of the current development status of cryptocurrencies, we advance the following suggestions.
Strictly implement FATF's international standards on AML/CTF FATF has made a great contribution to the fight against terrorist financing and has achieved remarkable results. In the new situation, FATF can quickly respond to the use of cryptocurrency by terrorist organizations and issue a series of suggestions and programs that are of great security significance. FATF reviews the implementation of FATF from time to time and provides feedback to help countries with backward financial mechanisms to carry out anti-terrorism construction.
At present, most countries in the world fail to carry out the necessary supervision of virtual assets and fail to fully realize the potential risks of cryptocurrency in terrorist financing. From the perspective of national security and stable development, all countries should strictly implement FATF standards and actively practice international cooperation to combat terrorism jointly.
The effectiveness of law enforcement is worth noting. Since the public generally lacks an understanding of the new form of cryptocurrency crime, if they encounter a crime similar to theft or extortion, they may not report it at all, believing the police incapable of helping (Kfir, 2020).
Strengthen the effectiveness of monetary policy and improve the attractiveness of legal tender
The central bank should strive to enhance the effectiveness of monetary policy and the attractiveness of domestic legal tenders. For example, the central bank can issue its own digital token to supplement the physical cash and bank reserves according to the situation in its own country; then, it can carry out point-to-point exchange in a decentralized manner, by encrypting assets to make the currency of the central bank more friendly in the digital world. Christina Lagarde, managing director of the IMF, pointed out in her speech to the Bank of England:
In the face of the impact of crypto- currency on fiat money, the best countermeasure for the central bank is to continue to implement effective monetary policy, and to be open to new ideas and requirements with the development of the economy.
The formulation of the central bank’s monetary policy can also benefit from this technology. For example, the central bank can improve its eco- nomic forecast through big data, artificial intelligence, and machine learning to better cope with the competition between cryptocurrency and fiat money (He, 2018). By improving the competitiveness of legal tenders and reducing the market scale of cryptocurrency, the acceptability of cryptocurrency will be reduced, and the trust of terrorist organizations will be reduced.
Actively implement international cooperation to crack down on terrorist financing in recent years, terrorist organizations such as the “Islamic state” and the Taliban have spread to sur- rounding areas, and the terrorists they trained have returned to their home countries, spreading extremist ideas and threatening the security of the surrounding countries. Because of the transnational mobility of terrorism, the fight against terrorist financing needs close international cooperation. In addition, one of the advantages of cryptocurrency is that it takes less time for money to flow across countries. Therefore, it is necessary to establish an information-sharing mechanism to crack down on the terrorist financing of cryptocurrencies. By signing bilateral or multilateral treaties, we can promote the effective development of antiterrorism financing among countries.
Acknowledgements
We are grateful to the Belfer Center of Harvard Kennedy School, the Research Center for International Terrorism Issues of SWUPL, and the Institute of Chinese Financial Studies of SWUFE.

Funding

This work was supported by the “Double First-Class” discipline construction project of Central University of Finance and Economics, and the Key Research Base of Humanities and Social Sciences in Colleges and Universities of Sichuan Province–Counterterrorism Research Center.
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