CATF Reports Sep. 14, 2015, 3:16pm


Last January, an Israeli cyber-security expert claimed that an ISIS sympathizer believed to be in the U.S. used the digital currency known as Bitcoins to solicit funds via a jihadist website. The ISIS sympathizer, who identified himself as Abu-Mustafa, engaged in terrorist financing on the dark web—the murky part of the internet that piles on an extra layer of secrecy to Bitcoins core reliance on encryption to conceal the identities of traders. Complaining that fundraising had become more difficult, Abu-Mustafa proceeded to open a Bitcoin account and offered to purchase five Bitcoins. That was before his anonymous Bitcoin account, known as a “wallet”, was closed down.

In other stark examples, jihadist advocates seeking recruits through the internet have discussed the potential of digital currencies such as Bitcoin as ideal funding mechanisms, and one anonymous author who claimed affiliation with ISIL suggested using Bitcoins as a donation vehicle in his blog post Bitcoin and the Charity of Violent Physical Struggle.

Bitcoins are a medium of digital currency denominated in dollars that are bought and sold on the internet without the presence of a trading intermediary, such as a stock exchange, brokers, or clearinghouses. As the Bitcoin interest group explained, its digital marketplace instead “relies on peer-to-peer networking and cryptography to maintain its integrity.” Because the medium is a fairly new value transfer mode - and one of several digital payment platforms - its mention in articles about criminality and terrorism raises numerous technical as well as policy questions. Basically, Bitcoins are similar to other means of transferring value in closed marketplaces that use their own unique form of scrip much like miners used in company stores a century ago. More traditional modes of value transfer exploited by criminals and terrorists are hawalas and black market peso exchanges, but neither offers the advantage of worldwide payments executed in a nanosecond - and devoid of a risky paper trail.

Bitcoins mirror the market dynamics of scrip with one key exception: they are limited in number by the issuer and are traded like securities. That means the value of one Bitcoin unit can fluctuate according to demand factors unique to Bitcoins, including payment of a premium for the advantage (to criminals and terrorists) of absolute anonymity with equal secrecy shrouding each transaction. The result: Bitcoin buyers may decide to bid up the unit price in order to secure a medium of exchange that protects them from detection. That is why Bitcoins have rapidly become so popular with tax evaders, child pornographers, drug dealers, and terrorists. Conversely, negative publicity and US government exposure of Bitcoins as an organized crime and terrorist threat, can cause the unit price to drop - as it has in the recent past. Bitcoin prices quoted on the internet have fluctuated between $2 in 2011 per unit and $240 earlier this year, with a high in 2013 of $1000.          

In a rush to regulate a burgeoning digital marketplace that is structurally devoid of internal controls, the US Treasury has moved to set enforcement parameters. Earlier this year, the Financial Crimes Enforcement Network (FinCEN) levied a fine against Ripple, the virtual currency provider second in size to Bitcoins. Ripple was fined $740,000 as an unregulated money service business (money remitter), an action that does not bode well for Bitcoin, which shares important structural similarities with Ripple. In an unrelated action by the SEC, a website operator was charged civilly with trading in securities - Bitcoins - without being registered.

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