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Cryptocurrency and Terrorist Financing in Asia

Cryptocurrency, or crypto, is viewed by many as the future of financial transactions. While the rise and further development of crypto are widely celebrated, speculations about its traceability, and its potential to be used in criminal activities, always loom in the horizon.

A handful of states around the world have already taken measures to regulate crypto transfers, in line with the Financial Action Task Force’s (FATF) 2020 standardized guidelines, securing virtual assets from money laundering and terrorist financing. Yet, many states in Asia, including those with a history of terrorism, are falling behind, increasing crypto’s potential to be a threat multiplier.

Indonesia, for instance, is still an observer in the FATF, and does not face any obligations to implement the guidelines, while the Philippines is on the brink of being included in the FATF grey list owing to “strategic deficiencies” in the country’s anti-money laundering and terrorism financing systems. Most importantly, however, these states still prefer to heavily invest in monitoring conventional financing channels, exposing large gaps in the political will to actively track crypto flows.

Bank Indonesia’s Payment System Blueprint 2025 recognizes that cryptocurrency runs the risk of spurring increased money laundering and terrorist financing, yet steps safeguarding the use and ownership of digital currencies remain largely absent from the country’s nascent cybersecurity laws. The Anti-Money Laundering Council in the Philippines, in its Terrorism and Terrorism Financing Risk Assessment 2021, cited suspicious virtual currency transactions worth 1.77 million Philippine pesos between 2019 and 2020, yet the country puzzlingly still allows crypto to be used as a legal tender, cashed out as fiat currency from Union Bank of Philippines ATMs.

Operational Freedom

To solve this puzzle, we must pause and ask why terrorist organisations will perceive digital currency as an important lever to adopt into their operational strategy. While the literature on terrorist innovation is limited, there is cogent analysis on grand strategy that can potentially help us – armchair analysts and policymakers alike – comprehend the viability of local terrorist hubs adopting cryptocurrency as a financial tool.

Often, terrorist organisations have centralized decision-making and decentralized execution. This means any innovation in the grand strategy of a terrorist group is designed by the top brass of the leadership. This looks like Wadie Haddad’s influence on the PFLP to adopt airline hijacking as a critical move against Israel, or Osama Bin Laden’s push to shift focus away from the near enemy in the Middle East to the far enemy – that is the United States.

Almost all instances indicate a top-down process of adopting innovation in grand strategy, where individual leaders with strong personalities and authoritarian leadership styles played pivotal roles in important decision-making processes that changed the identity of the organisation. While terrorist leadership always appears open to suggestions from their subordinates, it is often only the execution of decisions that is left to the lower-level members, who occupy the local hubs.

Since the late 1990s, most terrorist transnational networks, including al-Qaeda and the Islamic State, have seemed to divide their responsibilities, whereby the vision is laid out for the local hubs, but the operational strategy is left for the leaders and entrepreneurs in charge of the hub to figure out on their own. For instance, think back to the bombing of the USS Cole in 2000, where Walid bin Attash, who served as Bin Laden’s bodyguard, oversaw renting an apartment in Aden with the “appropriate” vantage point over the USS Cole, managing capital for recruitment and operation as the middleman, and mechanizing the whos, hows, wheres, and whens of a recruitment strategy that invited the most passionate into the fold.

For local terror hubs whose current bottom-up operational strategizing focuses on grassroots recruitment and small to medium scale attacks, the adoption of cryptocurrency appears as a lucrative alternative mode of financing, providing their funders with easy access due to crypto’s pseudo-anonymity in transactions. Local hubs, who might only receive start-up funds and an annual allocation of finance from their transnational headquarters, become open to receiving large donations from international aspirants in their region of operations, which otherwise would not have been possible due to either strict periodical monitoring of traditional financing channels or a general fear of getting caught.

Most importantly, the potential adoption of cryptocurrency allows terrorist groups who were otherwise restricted to their region of origin to aggressively pursue expansion into neighbouring regions, since the finance will follow them without potentially leaving a trail. This means groups like Neo-Jamaat-ul Mujahideen Bangladesh (Neo-JMB) in Bangladesh will not have to restrict their footprint in the mountainous terrain near Bangladesh’s border with West Bengal just to ensure cover for their middleman as they bring in cash and a meagre weapons supply. The use of cryptocurrency will enable fast distribution of finances into other regions, facilitate more recruitment missions, and likely make the role of middlemen – which both al-Qaeda and ISIS have historically employed – obsolete.

Importance of Intentions

It is also crucial to note that the local hubs function as individual actors who are tasked to initiate and sustain operations on their own. For these actors, the political gulf between intentions and consequences applies in the same way it applies to nation-states. The only difference is that their motivations may run much higher than anticipated.

For the West, most notably the United States, the reconnaissance-strike complex turned out to be the “master weapon” and a key strategy to win wars swiftly and decisively since the early ‘90s. For terrorist organisations like al-Qaeda, and later ISIS, replicating the reconnaissance-strike complex was impossible. Terrorist groups, since then, have resorted to bypassing their adversary’s advantage by abandoning traditional modes of measuring military success – there is no tactical chain of command; even technical skills to master the conventional warfare became seemingly unnecessary. Instead, transnational groups empowered local hubs to design and organise their operations, allowing them autonomy to conduct multimodal experiments in their respective theatres to identify the most effective method to strike the enemy.

The significance of this analysis is that the motivation to stay in the fight and the never-backing-down outlook begin to play a pivotal role in a terrorist actor’s intentions, and subsequent consequences. Incessantly seeking to bypass the adversary’s military advantage means the costs to initiate and sustain operations appear lower than they are, and there is always a stronger will to maximize gains. This provides sufficient and necessary context why the more recent generation of terrorist recruits – tech-savvy engineers helming leadership positions in the local hubs – will see the adoption of cryptocurrency as a key operational gain and will likely seek to achieve the first-mover advantage in their respective regions.

The assumption we make is that the traditional framework of terrorist financing will always exist, but the ease of access in setting up potentially untraceable cryptocurrency transactions will compound a local hub’s strategy of bypassing the adversary’s web of defense, dismantling the resource constraint that once dominated the operational calculus of these transnational non-state actors.

If the changing character of war teaches us anything, it’s that transnational terrorist networks are always on the lookout to find strategic advantages. In this regard, working through financial tools left largely unmonitored by the State apparatus will be attractive. Possibly the best example of a first-mover advantage came in May 2020, when the Philippine Institute for Peace, Violence and Terrorism Research (PIPTVR) reported the first-ever cryptocurrency transaction made by the Islamic State-backed local hub under the Filipino government’s nose, with the funds allegedly directed toward activities in the conflict-ridden Mindanao region in the southern Philippines. Some might dismiss this instance as a rarity; others may argue for stringent regulations. But it’s undeniable that terrorists will experiment with cryptocurrency to rejuvenate their activities. Leaving crypto outside the purview of anti-terrorism financing frameworks may prove costly.

(Asif Muztaba Hassan is a journalist based in Dhaka, Bangladesh)

– The Diplomat


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