Is Bitcoin being used to finance terror?
Does Bitcoin's anonymity make it a convenient tool in the hands of terrorists and child molesters? And if so, what should be done?
There have been a flurry of articles suggesting terror organizations are using bitcoin to fund their activities. While it seems a bit impractical for ISIS to use bitcoin in the near future to fund their rape and pillage of Iraq and Syria - the bitcoin ATM infrastructure is a bit lacking in Mosul, and ISIS has been self-funding through extortion and black market oil sales - the concerns should not be dismissed. Can terrorists anonymously finance their operations using bitcoin?
The answer is, they probably could with small amounts but it is not easily done, and in any event this should not overly influence the policy debate. The argument is nicely made by Andreas Antonopoulos in his October 2014 speech to the Canadian parliament, in which he states that the positive uses of the technology far outpace the negative. Technological innovation with the potential to improve lives in a variety of different ways should not be abandoned due to misuse by a small minority. Indeed, advance in technology - whether the internet, mobile telephone or bitcoin - empowers all of society, both the good majority and the evil minority - whether terrorist, troll or child porn enthusiast. We should not allow ISIS, Hunter Moore, or some pervert to veto societal progress.
Antonopoulos adds that bitcoin is not actually anonymous and transactions can be traced through the blockchain from wallet to wallet. It is the responsibility of law enforcement to follow the funds to their point of origin, just as they must in standard money laundering/illegal funding investigations.
Anonymity and its Limits
In every single transaction chain, there must be at least one person that made an initial fiat deposit, or bitcoin would still be sitting with the miners. In other words, you cannot receive bitcoin if you 1) did not make a deposit or 2) did not receive it from someone who made a deposit (or did not receive it from someone who received it from someone who made a deposit, and so on). In the example below, while wallet C and wallet B might have only opened wallets and been transferred bitcoin from an acquaintance, friend A deposited fiat at an exchange to purchase bitcoin. At the point where the bitcoin network and the outside world connect is where anonymity ends.
Now, let's imagine that in the example above wallet C belongs to an ISIS terrorist, who wants to use the money to behead people and destroy museums in Syria and Iraq. How exactly will he remove the money from the bitcoin account to buy his guns and sledge hammers?
First, he could try and withdraw the money. But this would require opening up an exchange account and divulging personal information. Perhaps he knows a gun runner who accepts bitcoin payment. But again, someone will eventually need to exchange the bitcoin for cash (until bitcoin is so widely adopted that there is no need for fiat). So, on the withdrawal side, there is difficulty in removing the money as well. So yes, there is anonymity within the bitcoin network, but the anonymity disappears when entering or exiting the network.
Enter the Bitcoin Anarchists
A group of bitcoin anarchists calling themselves "unsystem", led by developer Amir Taaki and Cody Wilson - who is best known for releasing instructions on how to create a gun using a 3D printer - are working to undermine the ability of authorities to track bitcoin transactions through the network. Their opening salvo in the struggle is called Dark Wallet, which encrypts and mixes together all payments from users, making it extremely difficult to find who is transferring money to whom. For fund recipients, Dark Wallet offers a stealth address which is hidden from the blockchain. If someone were to search for the address, they would find nothing. This seems to be just the application that terror financiers crave and investigators dread. (Despite the fact that even one small misstep along the path would serve to expose the entire theoretical terror financing network to authorities).
Taaki is a terrible advocate. He seems to crave his position as bitcoin anti-establishment figurehead. In a BBC interview he was described as playing to the cameras while saying "We will build. We will launder money, we will evade taxes, we will uncensor drug markets and there's nothing the government can do about it". He has elsewhere described his Dark Wallet as "just a money laundering software", and claimed "I think it is great that terrorists are using bitcoin, because it shows that the tools we're building actually work."
However, apart from all the bluster, he does go on to make an interesting point. Bitcoin is much more likely to provide anonymous support to those being repressed by governments or organizations like ISIS than it is to provide support to repressive governments or ISIS themselves, who either control the money supply or have massive networks raising funds through any number of methods. Yes, there could be some terror fundraising using bitcoin but no, it does not really seem to alter the picture in any meaningful way.
And Taaki is making a larger point, albeit in provocative fashion. The last 15 years have been largely defined by the threat of terrorism and our reaction to it, which has had enormous ramifications both at home and abroad. It is probably fair to state that most people have focused attention on how the threat is being faced abroad, while neglecting to seriously consider how things have changed at home. We use the United States as an example, but the same point could be made elsewhere.
Often safety is represented as being on the opposite side of the pendulum from liberty, with swings in either direction coming at the expense of the counterpart. Our representative governments, entrusted with the safety of the citizenry, have historically been granted the power to determine the appropriate balance of the pendulum. It is natural that at times of war the pendulum swings away from liberty and towards greater security. Two poignant examples would be President Lincoln's suspension of Habeas Corpus during the Civil War and FDR's allowance of the internment of Japanese citizens during World War II. As threats recede, the pendulum naturally swings back in the opposite direction, often accompanied by a reaction best likened to waking up after an extremely drunk night out - "we did what??"
In response to the September 11th attacks, the United States passed the Patriot Act which offered the government a host of surveillance tools meant to facilitate the struggle against terrorism. One would imagine most Americans are a bit uncomfortable providing the government enhanced surveillance powers from an ideological perspective, but practically speaking support the need for such measures as a necessary evil. In the years following September 11th, the bill was reauthorized and extended without much debate or opposition. Then Edward Snowden released a trove of NSA documents detailing exactly how the government was using its surveillance powers.
Whether Snowden is a hero, a traitor or a patsy is not of much consequence. The point was that the released documents made it impossible for people to ignore how the government was using its new powers - namely, to surveille domestic communications of all Americans, not simply suspected terrorists. When confronted with this uncomfortable truth, Patriot Act supporters have made note that the government only examines broad metadata - information about your telephone calls and email communications - and that it does not delve into the content without probable cause. However, it is a thin line with which many Americans are not comfortable. Is probable cause limited to terrorism for which the act was initially intended, or has it been extended? How does one know information will not be used for personal or political motivations? And perhaps this government acts responsibly, but what about the next?
Additionally, the War on Terror is an entirely different animal from the Civil War and World War II, in which liberties were temporarily suspended and reinstated after the wars ended. Does the War on Terror have an end? It seems there will always be terrorists dedicating their lives to the murder of as many people as possible, and some might live domestically. Have we opened Pandoras Box? Did we sacrifice our privacy for security?
The libertarian would say that it is extremely rare for centralized authority to willingly relinquish power. The crypto-anarchist would likely say that these centralized authorities are aided by an internet that is effectively broken, which has become steadily more centralized to the point that it offers governments and bad actors great surveillance efficiencies. They see bitcoin and the blockchain as a method of repairing the internet and rolling back these surveillance capabilities. And if this serves to make security a bit more difficult, it might be called the price of freedom.
Bitcoin Price (USD): 766.11