Cryptocurrency under scrutiny after link to funding Hamas attack on Israel: 'proliferation' of illicit use

Hamas has used millions of dollars in cryptocurrency to fund their activities, including the acquisition of weapons used in the terrorist attack on Israel last week, according to reports. 

"I think criminals have kind of figured this out from an early stage, and it's why we've seen a proliferation in terms of supporting illicit finance," Elaine Dezenski, senior director of the Center on Economic and Financial Power at the Foundation for Defense of Democracies told FOX Business. 

"It's not just what we see with terrorist groups — there are lots of examples of that — but it's also how it's being used for facilitating narcotics, for any kind of illicit finance that you can possibly imagine," she said.

"This is sort of, again, the irony of it," she added. "It's being used and co-opted by criminals more quickly than regulators can get a handle on what these challenges are and how to address them." 

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At least 3,200 people have been killed since Hamas launched thousands of missiles into Israel last week, including at least 1,300 Israeli civilians and soldiers and 27 Americans. Palestinian health authorities say at least 2,215 Palestinians have been killed and more than 8,700 wounded.

A report from the Wall Street Journal found that Hamas, Palestinian Islamic Jihad (PIJ) and Hezbollah have received large amounts of funds through crypto, citing a review of Israeli government seizure orders and blockchain analytics reports. The Journal determined that Hamas received about $41 million in crypto between August 2021 and June 2023.

The PIJ received as much as $93 million in the same period, according to the outlet. 

Senate Banking Chair Sen. Sherrod Brown, D-Ohio, vowed to investigate the role cryptocurrency played in funding the attack on Israel, and Sen. Elizabeth Warren, D-Mass., has started a renewed push to pass a bill that would impose anti-money laundering rules on cryptocurrency, Politico reported. 

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U.S. officials have talked at length about how Iran has for years funded proxy groups around Israel, including Hamas and Hezbollah as well as over a dozen others at the country’s borders, providing weapons and funds to the groups. 

The U.S. State Department has stated in the past that Iran provides some $100 million a year to Palestinian armed groups, including Hamas. The cryptocurrency funds have only bolstered that already robust funding, and the lack of regulation around crypto has made it difficult to ensure that it doesn’t end up in criminal hands, according to Dezenski. 

"There's really no equivalent set of regulations around anti-money laundering [of crypto]," she argued. "It becomes difficult to apply that same sort of framework that banks are subject to," noting that banks also don’t pay as much attention to the "holes" in the process of exchanging cryptocurrency for fiat currency. 

But one of the bigger challenges lies in the fact that cryptocurrency can go through "mixer" systems as part of its function, which makes it harder to track the coins — going against the initial much-touted promise of greater transparency with digital currencies.

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"The challenge comes with the way that the coins move through these systems where, for example, you can move your cryptocurrency through a mixer, which basically splits out a transaction to $10 going through… it could split it into multiple smaller pieces, making it difficult to track where those smaller bits go," she explained. 

Even when the coins are eventually reunited in a further transaction, the crypto becomes so shrouded within the system that it's "very difficult to piece it back together."

"So that's what's been happening," she said. "It's kind of the clever use of these mixers and other components within the system that allows for this obfuscation of the asset of the crypto."

The promise of greater transparency in exchanges, with cryptocurrency wallets supposedly tracking every owner and exchange involving the coins, has seemingly given way to a darker purpose – and one that criminals took advantage of early on in its use.

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"The reality is something different, which is the way that these systems have developed," Dezenski lamented. "There are many different ways to shroud these transactions in opacity, which make it much more difficult."

The only way to tackle this issue, according to Dezenski, is to figure out what relationship the U.S. wants with digital currency going forward, having already avoided "important decisions" about the currency that would include its use and regulation, which would make it harder for illicit use if it fell more fully under an official designation and structure. 

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"Then there's the question of, all right, now we've defined what kind of system we want, what are the guardrails that we need to build around it," as well who owns what components of the system and such, moving away from "stopgaps" and toward something more effective. 

"There's a lot that the U.S. government needs to grapple with, and I think that process is moving, but it's moving pretty slowly," she concluded. 

FOX Business' Brooke Singman contributed to this report.