Crypto is a small slice of Hamas' funding — but it's deadly

As lawyers and prosecutors rake over the ashes of Sam Bankman-Fried's fallen FTX cryptocurrency empire, another reckoning for digital currencies is underway: Governments around the world are intensifying their crackdown on sources of funding for terrorist groups — including crypto — after Hamas' bloody attack in Israel that claimed more than 1,400 lives and led to retaliatory attacks that have killed thousands.

Crypto is a small but deadly slice of overall terrorism funding: Research by analytics firm Elliptic in 2021 estimated that wallets linked to Hamas' military wing had received more than $7.3 million in crypto, including around $40,000 in Dogecoin, the dog-themed memecoin favored by Elon Musk. These sums aren't much compared with the $100 million that Iran sends annually to Hamas and other Palestinian terror groups or with Qatar's $360 million in aid for Gaza, or the approximately $300 million Hamas gets via business taxation and extortion estimated by the Washington Institute's Matthew Levitt. But small amounts can make a difference in an era of low-cost, low-tech attacks. An estimate of the Sept. 11, 2001, attacks by the New York Times found they cost Al-Qaeda half a million dollars but cost the U.S. $3.3 trillion.

Governments are right to take crypto seriously — it allows for large sums to be moved around the world with a high degree of anonymity (albeit leaving a transaction trail) and is part of the wider tapestry of terrorist finance, often used in conjunction with social media, remittances and pre-paid cards. Funding tends to pick up during times of conflict, and Hamas' halt on Bitcoin donations, announced in April, might not be forever — Australia's national financial crime agency this week flagged appeals on Telegram for crypto donations for Hamas, according to an AFR report.

The net is widening. After Israel swooped on crypto accounts linked to Hamas last week, and reportedly froze a Barclays PLC bank account apparently tied to Hamas, the U.S. Treasury on Wednesday slapped sanctions on financial entities and operators linked to Hamas. They include a Gaza-based money transfer and crypto business called "Buy Cash," as well as facilitators using companies in Sudan to launder money and generate revenue. The Treasury announcement highlighted not only the fundraising side of the crypto equation, but also the use of Buy Cash to transfer funds for affiliates.

This should strengthen the post-FTX drive to tighten rules governing the crypto industry, which has been pushing back against regulators' efforts to erect a firewall around traditional finance and protect consumers from another boom-and-bust cycle. Over the past week, Australia has proposed extending existing financial-sector rules to crypto exchanges; U.S. Senator Elizabeth Warren is building bipartisan support for a tougher stance on crypto from the Biden administration; and FTX rival Binance has said it will stop accepting new users in the UK to comply with the country's crypto marketing rules. Crypto companies like Coinbase Global Inc. will find it harder to gain the legal certainty they're asking for, even as traders seem more excited by the prospect of a Bitcoin exchange-traded fund.

Some humility is warranted in this important fight: Cracking down on terrorist funding is no panacea, and it's an extremely complex affair. Getting it wrong could mean obstructing or delaying genuine humanitarian aid in a crisis where the death toll is climbing by the day. And even a successful interception of funds might only be a temporary victory. Chainalysis' Andrew Fierman points out that even though blockchain transactions are traceable and law enforcement usually catches up, strategies to evade detection have become increasingly sophisticated. Hamas at one point used tools to generate a new address for each attempted crypto donor to mask their identity.

But it's a fight worth waging. There are as many sources of terrorist funding as there are letters in the alphabet, from art to gold to zakat taxes. Crypto may not be as prevalent as cash, but it's up there. Following terrorism's money will necessarily mean more tracing of the virtual kind.