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In January 2017, Indonesias anti-money laundering/counter-terrorist finance (AML/CTF) agency provided the first specific, public allegations from a government of terrorists using cryptocurrencies.

According to Indonesian government sources, Bahrun Naim, a member of Daesh (also known as the Islamic State of Iraq and Syria, or ISIS), sent Bitcoin to fellow members across Indonesia to avoid transferring money through the formal financial system.

Is this a sign of a coming wave of terrorist financing using new technology? Is Bitcoin a menace that should be banned, as US Senator Joe Manchin advised in 2014?

The prospect of terrorists relying on cryptocurrencies a subset of privately developed, tradable stores of digital value referred to as virtual currencies has prompted action from a number of jurisdictions.

The EU Parliament is expected to pass measures soon requiring the UK and other member states to bring certain virtual currency service providers within their AML/CTF regulation. These measures do not seek to prevent the use of cryptocurrencies, but will require virtual currency service providers to implement customer due diligence measures, just as banks do now.

Certain features of cryptocurrencies, which are not backed by any government, have no status as legal tender and rely on network protocols and cryptographic techniques to enable counterparties to transact, present illicit financing risks.

Cryptocurrencies enable rapid and borderless transaction settlement on a peer-to-peer basis. This means that network participants can transact directly without relying on a financial institution to process or settle the transaction.

In addition, cryptocurrencies contain various levels of pseudonymity or anonymity. In the Bitcoin network, users are identified not by their name, but by an alphanumeric public key.

Technologies that allow users to make rapid funds transfers outside the formal banking system and using concealed identities might seem to have enormous appeal to Daesh and other global terrorists.

In truth, however, the threat landscape presents a more muted picture; terrorist financing via cryptocurrencies is a risk that could grow with time, but one that warrants a measured response.

Available information on terrorists use of cryptocurrencies is limited and anecdotal. In June 2015, the US charged a Daesh supporter for posting on Twitter about how others might use Bitcoin to fund the terror group. However, in that instance, there is no indication that actual transfers took place.

In August 2016, a former CIA analyst published findings identifying a Palestinian media organisation, the Ibn Taymiyyah Media Center, a Gaza-based online jihadist news agency labelled by the US as having terrorist connections as receiving small-value Bitcoin donations. Otherwise, and with the exception of Indonesias announcement, the public record is unspecific and speculative.

Still, security agencies have focused on the possibility that cryptocurrencies use in terrorism could grow. Terrorists are rapidly becoming more technologically adept. The head of Europol, Rob Wainwright, recently described terrorists as winning the online arms race, relying increasingly on social media and online platforms to generate support faster than law enforcement can keep pace.

As terrorists expand their online presence, security agencies worry their use of cryptocurrencies will expand. Governments are anxious about terrorists use of the dark web or encrypted portions of the web where users interact anonymously and where cryptocurrencies often feature.

Of particular concern to law enforcement agencies is the use of mixers or tumblers. These privacy-enhancing tools obscure the trail of cryptocurrency transactions and can stifle attempts to decipher financial activity.

Still, perspective is necessary. It is not yet clear whether cryptocurrencies will become a major terrorist funding tool, at least in the near-term, and the longer-term picture remains uncertain. Indeed, terrorists already have a number of reliable financing streams, which show little sign of drying up.

As Tom Keatinge and Florence Keen illustrate in a recent RUSI report, lone actor and small cell terrorists fund their activity on a micro scale, using easily accessible financial services. This includes student and payday loans, public benefits, and cash.

These funding methods are often impossible for the financial sector or intelligence agencies to spot ahead of their use in terrorist operations. With such simple funding available, terrorists may not need to rush into cryptocurrencies.

Treating cryptocurrencies as an exceptional threat creates the misleading impression that more conventional financial products are not already equally, or more, vulnerable to terrorist exploitation.

Cryptocurrencies are also not necessarily impenetrable fortresses of secrecy; indeed, as the Indonesian case demonstrates, law enforcement agencies can identify their use. With Bitcoin, which is by far the most widely used cryptocurrency and relies on a public ledger the blockchain to record transactions, law enforcement agencies have a number of methods for uncovering illicit activity.

Whats more, banning Bitcoin or other cryptocurrencies could stifle important innovations that could enhance financial services. While it is still far from clear how significant an impact cryptocurrencies will have, a number governments, including the UKs, are keen to enable innovation in the sector.

Cryptocurrencies have particularly vocal champions among some proponents of financial inclusion, or expanding financial services to the worlds poor. Cryptocurrencies peer-to-peer nature enables transfers to occur at reduced cost compared to credit card transactions and other established payment methods that rely on numerous intermediaries.

Proponents argue cryptocurrencies could play a role in helping the unbanked to access cost-effective financial services.

Virtual currencies therefore offer governments a test case in harnessing the promise of technological innovation while also managing financial crime risks that are still only taking shape.

Countries should pursue a sensible approach. They should ensure their law enforcement agencies have the necessary resources and skills to uncover related illicit activity; and they can work to improve information sharing with their foreign counterparts on joint investigations.

Limited efforts at regulating certain cryptocurrency service providers, such as cryptocurrency exchanges, mark a reasonable initial attempt at oversight.

Countries should take time to monitor and assess the effectiveness of new regulation before rushing into further action.

As with any new technology, awareness of risks is critical. But overreaction and panic in this early stage in cryptocurrencies history would be misguided.

David Carlisle is an independent consultant specialising in devising strategies for combating financial crime.

Banner image: If Bitcoins were real currency, this is perhaps what they would look like.Courtesy of Isokivi/Wikimedia.

See the original post here:
Cryptocurrencies and Terrorist Financing: A Risk, But Hold the Panic - RUSI Analysis

Executive Brief

Like many technological advances before it, cryptocurrency has spawned a rapidly developing industry. In this highly competitive field it is important to have every advantage you can get. Anyone can put together a team of individuals and give themselves impressive sounding titles, but few have watched the process of innovation take place first hand, because most are too young to remember the internet and personal computer booms, as well as the subsequent bubbles. The same cannot be said for DNotes co-founder Alan Yong, however - a man who has 40 years of business experience, including 20 years as a pioneering innovator in the software and personal computer industries.

His company, Dauphin Technology, went head-to-head with industry giants such as Apple computer Inc., Tandy Corp., and Motorola in the early days of the personal computer revolution. Since he has seen firsthand the trials and tribulations that projects in emerging tech sectors can face, he knows better than most how to avoid the pitfalls that threaten most entrepreneurs.

Read the full story below.

Today we sit down with Alan and ask him a few questions about the similarities between early PC days and this current stage of the cryptocurrency development process.

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What similarities do you see between the early computer industry and cryptocurrency? What is different?

Yong: The huge potential of both industries is obvious to many people at the formative stage and the barrier to entry is low. These factors enable many less qualified participants to jump in with a me-too mindset under-prepared and ill-informed with a wishful thinking that they can make it too. In such an environment, the industry becomes very competitive and over-crowded quickly. Like the laws of nature it evolves to be a survival of the fittest space where many vanish and others are absorbed by the dominant few.

While there might have been exaggerated claims of their capabilities and size such as we are the finest and largest PC manufacturer with the best price when they were assemblers of computers parts; the emerging PC industry conduct was reliable and trustworthy. Building a trusted brand to gain repeat customers was important. The cryptocurrency world, on the other hand, has been more like the wild west - with little restraint on bad conduct under the cover of anonymity. With a great deal of investment and get-rich-quick mentality, scams and misrepresentations are rampant. The technology itself is much more complex for the average participant to understand, and thus, an easy exploit for those who thrive on taking advantage of those who might be new to the industry.

At one point, there were thousands of computer companies and startups, and now there are thousands of cryptocurrencies and blockchain projects. Would you say one industry is more over-valued than the other, based on speculation, at this stage of the development process?

Yong: There were indeed thousands of computer companies and start-ups within the first few years, leading to explosive growth of a vibrant ecosystem supporting the industry. Much like today, there were many publications, conferences, and industry consultants. But most them became irrelevant and few still exist today. The digital currency space with its under-pinning blockchain technology, along with the catch-all Fintech (Financial Technology), is significantly more massive and disruptive.

The value exchange of the personal computer business was dependent on the delivery of tangible goods and services with little accommodation for under-delivery or failed delivery. On the other hand, cryptocurrency, by itself, has little to no intrinsic value. Unless there is a link to fundamental value, it is very speculative and volatile, and in many cases overvalued. Sadly, speculators mentality is not based on value but based on hope that it could be worth significantly more to the next buyer.

Obviously, the personal computer was a groundbreaking innovation that has changed many lives. Will blockchain, and specifically cryptocurrency, have that same level of impact on the world?

Yong: I believe that the overall impact will be more massive, far-reaching, and disruptive; creating a generational opportunity for those who know how to participate at the right time.

Unfortunately, blockchain seems deceptively simple yet conveys certain prestigious connotation so many want to be associated with it without legitimate justification. There will be many failed projects involving situations without a sound business model backed by a knowledgeable team.

As a package the digital currency, the underpinning blockchain technology, and the global payment system using the ingenious peer-to-peer distributed ledger consensus system will have enormous world changing implications. It will be decades before the full array of benefits can be realized.

Does cryptocurrency have more competitors since it threatens to disrupt the financial/banking status quo, which has operated in relatively the same way since its inception?

Yong: The banking and financial services industry, including credit and debit card, along with global payment and settlement network is massive, but outdated. Tens of thousands of competitors will be competing for a piece of a very large pie. The smart ones will take advantage of their lower cost structure and focus on a niche that offers profitability and the potential for quick scalability. It will be very disruptive. The banking industry is aware of that and actively repositioning itself to participate in their version of a private blockchain. The centralized nature of the banking industry coupled with restrictive regulations will be too burdensome to mount an effective defense. Consequently, there will be many opportunities for innovators.

Most computer companies went out of business, do you think the same will happen with cryptocurrency endeavors?

Yong: There is no doubt that it will be the case. This is a very complex industry with many moving parts that can be promoted in different ways. Thus, it is impossible to separate reality from utopian ideas. The industry is already overwhelmed with ideas and published information, most of which few can understand. Furthermore, there are many bad actors in the mix of impatience investors overly anxious for quick pay-offs.

What is the most important lesson you learned during the PC boom?

Yong: Dont be a me too. Low cost barrier to entry can be a curse rather than a blessing. It may cost little to be in business but if you can hardly make enough money to stay in business you are burning up the best years of your life. You must be able to differentiate and be equal to your competitors quickly. If you are not among the best, you will fail. Doing the right thing at the right time is vital in a highly competitive and fast moving industry where the majority will fail.

Is there any advice you would like to give to others in the cryptocurrency industry?

Yong: This industry is still in its infancy. The technology is still evolving and ahead of regulations. Strategic positioning is invaluable at this stage; therefore, dont get ahead of yourself and use up your resources too quickly. Perfect timing is the key to success as much as poor timing is a major contributor to failure.

Long-term investors should be very selective to include a few candidates that are truly invested for the long-term with a compelling and clearly articulated vision. This is an emerging industry of sizable scale and scope. The right situation has enormous room for growth. But only a few will be successful enough to dominate.

More here:
Tech Revolutions: Cryptocurrency vs. Personal Computers Interview with Alan Yong - DCEBrief (press release)