Zoobia Shahnaz is a name that you may read about again. In December 2017, she was arrested in New York on a string of terrorist-finance charges. The federal indictment clarifies that she purchased Bitcoin with fraudulently obtained credit cards, wiring the proceeds to ISIS-related groups in Pakistan. The case spotlights a hole in the global financial system that authorities worldwide would like to plug.
Yet identifying a hole in the global financial system is different from uncovering a trend. Objectively, the debate over cryptocurrencies supporting terrorism may be one-sided. Existing evidence is anecdotal; examples are isolated; talk is speculative. Terrorists, awkwardly, already have many well-established channels to fund their work.
The London-based Royal United Services Institute, an established think tank on security affairs, argues against random and arbitrary policy moves. In a March 2017 commentary, it emphasized: “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.”
Some degree of measured response is appropriate. Most early-stage regulations are focused on know-your-client and volume-reporting standards:
United States. Bitcoin exchanges are required to document the beneficial owners of their accounts using new customer due-diligence criteria. We expect to see headlines tied to government enforcement of these rules after the May 2018 deadline. In that context, about 100 firms have now registered with the Treasury Department’s Financial Crimes Enforcement Network as money transmitters.
European Union. Germany and France have called for G-20 involvement in cryptocurrency regulation, placing it on the agenda for the March 2018 meeting of the group’s finance ministers. The approach avoids piecemeal oversight on a nation-by-nation basis, affording consistency in the borderless world of cryptocurrencies. Regardless, the EU will likely adopt a compliance model similar to the United States.
Emerging Markets. Industry news from the United Arab Emirates suggests that commercial banks are delaying some customer-initiated transfers to cryptocurrency exchanges. Malaysia published draft guidelines for the industry in December. Fear of being locked out of US dollar clearing capabilities is likely to drive hardened rules across the developing world.
Regulations are often problematic because most countries do not recognize cryptocurrencies as legal tender. That acknowledgement, at least philosophically, would upend the notion that countries have a sovereign right to control their money supply. Still another issue is that policymakers do not understand the asset class, viewing it with prejudice. Fortunately, recent expansion in the cryptocurrency market is alerting them to positive features of business, such as financial inclusion, despite near-term concerns over price volatility.
There are some nations that may be in a bigger hurry to implement far-reaching rules than others. Indonesia, for instance, has been an outspoken critic of cryptocurrencies. It bans their use by those fintech companies tied to payment systems. One reason is that Bahrul Naim, a Syria-based Indonesian, likely funded terrorist activities in his home country through Bitcoin. He is considered the mastermind behind the January 2016 attack that killed seven in central Jakarta. ■
Our Vantage Point: Pushing through capricious cryptocurrency regulation may inadvertently squelch the development of the fintech marketplace, while distracting authorities from monitoring more prominent terrorist-finance channels.
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Image: Terrorists use a broad array of financial products to fund their activities. Credit: Ixus at Can Stock Photo Inc.