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Blockchain analytics firm Chainalysis has debunked reports and analyses floating around in the media that inflate the role of cryptocurrencies in terrorism financing.

In a recent report geared toward correcting misconceptions regarding the use of crypto by terrorists to finance their operations, Chainalysis data revealed that digital assets play a minor role in the activity.

Correcting Misconceptions

Chainalysis pointed out that while some terrorist organizations, including Hamas, Jihad, and Hezbollah, raise and transfer funds using crypto, these transactions make up a small fraction of the already limited volume of illicit crypto transactions.

“Terrorism financing is a very small portion of the already very small portion of cryptocurrency transaction volume that is illicit,” Chainalysis said.

The report noted that terrorist groups have historically used traditional fiat-based methods like financial institutions, hawala, and shell companies as their primary financing channels and will likely continue.

Chainalysis emphasized that the transparency of blockchain transactions makes it less suitable for terrorists, which is a major reason why Hamas stopped accepting Bitcoin donations. This transparency allows law enforcers to track the origin and destination of every transaction on the blockchain, a feat that is almost impossible to accomplish with cash transfers.

Addressing Wrong Estimation Methodologies

The report further addressed the flaws in analyzing crypto flows into terrorists’ accounts. Following the recent attack by Hamas on Israel, several reports on the estimated amount of crypto used to finance the group’s operations have surfaced.

However, Chainalysis stressed that estimates of crypto-related terrorism financing are often inflated when analysts include all transactions processed by intermediary service providers and not just those directly tied to terrorist groups.

The report warned that while large sums of crypto may appear linked to terrorists, a significant portion of these funds are unrelated. To improve anonymity, most service providers pool multiple transactions from different users. Thus, tracing such transactions can result in inaccurate estimates.

The report cited an example of a wallet linked to terror financing with about 20 suspected service providers as counterparties. On one of the counterparties, the firm discovered multiple transactions involving huge amounts of crypto, over $82 million.

Chainalysis pointed out that it would be wrong to conclude that all the funds were raised for terrorism financing. Upon further investigation, the analytics firm discovered that approximately $450,000 worth of crypto from the known terror-affiliated wallet was transferred through this counterparty.

The report also encouraged investigators to consider the role of service providers as they can facilitate the movement of terrorism-related funds, knowingly or unknowingly. Meanwhile, earlier this week, the Israeli government disabled over 100 Binance accounts potentially linked to Hamas.

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