Cryptocurrency: A new era of finance, a new era of potential terrorist threats for Canada

by James Balasch, contributor

The popularization of cryptocurrencies like Bitcoin over the last few months has primarily been accompanied by discussion on its market activity, as investors watch its dramatic rise and fall in value daily. What is usually left out of the news cycle on this topic is how cryptocurrencies, by driving this period of intense change in the international financial industry, have created new opportunities for terrorist financing – thereby posing new threats to Canadian security that requires addressing.

Some of these threats come from the very nature of cryptocurrencies such as Bitcoin. Bitcoin was created in 2009 by Satoshi Nakamoto and was meant to be a “peer-to-peer” version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution. Nakamoto created Bitcoin as a currency free of state regulation, requiring no maintenance, with no additional costs and taxes, and most significantly, one that users could exchange anonymously through software that records the IP address but not the identity of the user. This last characteristic has made Bitcoin particularly appealing to criminals on the dark web, as exemplified by the website “Silk Road” that was started in 2011 for the exchange of cryptocurrency. Initially unnoticed by international authorities, American law enforcement terminated the site in October of 2013 due to its role in facilitating criminal activity. Despite instances of online cryptocurrency exchanges getting shut down, at a November 2017 panel held in Toronto, Chief Superintendent John Sullivan of the Ontario Provincial Police highlighted that organized crime increasingly relies on cryptocurrencies for activities such as money laundering. With research recognizing that terrorists utilize the financial strategies of organized crime to finance their activities, it would come as no surprise that cryptocurrency will likely be used to finance acts of terrorism in Canada in the near future. Highlighting the increasing difficulties of terrorist financing through traditional financial systems, the two main characteristics that make cryptocurrencies appealing to terrorist are their convertibility to fiat money and the anonymity of transactions. These allow terrorist groups that threaten Canada to transfer money internationally without any chance of being identified. 

Besides facilitating widespread and relatively unnoticed terrorist financing, virtual currencies such as Bitcoin have created another liability as they could potentially make hundreds of millions of dollars available to terrorist organizations with advanced technological know-how as hacking a private currency exchange site can be performed with very little trace. An example of this is the online Bitcoin exchange Mount Gox. Repurposed in 2010 by Jed McCaleb as one of the first exchanges for the purchase and sale of Bitcoin, it eventually became the world’s most popular Bitcoin exchange, at one point handling 70 percent of the international Bitcoin trade. In February of 2014, Mount Gox announced 850,000 Bitcoin, at that time totaling 480 million USD was missing and likely stolen. Although 200,000 Bitcoin were eventually recovered, none of the identities of those responsible have been confirmed. Heists like these demonstrate that we are potentially entering a new era wherein a terrorist group in a remote part of the world could exploit the weaknesses of these currency exchange sites to fund terrorist activities that could threaten Canada.

Although this is a new type of terrorist financing for the Canadian government, Canada is not new to the field of preventing terrorist financing. Created in 2000 as a unit under the Ministry of Finance, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is one of the country’s primary tools to prevent financial crime and terrorist financing. It detects and deters money laundering by analyzing reports on suspicious financial activities and passing relevant information from these reports to the applicable Canadian security agency. Through working closely as a regulator and intelligence agency with Canadian financial institutions including banks, loan companies, casinos, and securities dealers, FINTRAC works to make sure that these institutions properly monitor their customers’ account indicators that can trigger reports of suspicious financial activity. Although FINTRAC is well positioned to monitor government regulated financial institutions in the Canadian financial industry, it has very little ability to monitor an unregulated cryptocurrency such as Bitcoin, further exposing Canada to terrorist financing as its primary financial regulator and financial intelligence provider is undermined.

There are two main mitigation strategies the Canadian government can utilize to decrease the threat posed by terrorist groups using cryptocurrencies. First, due to pressure from law enforcement agencies worldwide, Bitcoin has agreed to cooperate in tracking currency suspected of being used for illegal activities, often to the regions and countries that this virtual currency originated from and was destined for. Canadian policy makers should take note of this. They should use whatever leverage they have to get Bitcoin to work with Canadian agencies that are stakeholders in anti-terrorist financing such as FINTRAC in utilizing Bitcoin financial intelligence. Canada should also be proactive and begin developing legislation as well as regulation technologies that prevents current and future facilitators of cryptocurrencies – such as exchange sites – from budgeting for fines for not fully complying with government money anti-money laundering and terrorist financing legislation, as many Canadian banks do today. The benefit of being proactive with these mitigation strategies is that as new cryptocurrencies such as Ethereum and Litecoin are built off the Bitcoin model, these strategies will likely become best practices, and help mitigate the threat posed to Canada by the utilization of cryptocurrencies by terrorist groups for years to come.