Cryptocurrency's Role in Geopolitics: The Complex Nexus with Global Conflicts : Daily News Analysis

Date : 24/10/2023

Relevance –GS Paper 3- Internal Security - Cyber Security

Keywords – Palestinian Islamic Jihad, cryptocurrency funding, Israel-Palestine conflict, blockchain transparency.

Context

Cryptocurrency's role in the ever-evolving arena of geopolitics is a narrative imbued with intricate complexities. Especially given the state of flux and turmoil in the current world order, this narrative often evokes concern and not optimism. The Russia-Ukraine conflict brought focus on the intricate relationship between cryptocurrency and global affairs, a connection far from straightforward.
A similar trend is now emerging in the Israel-Palestine conflict. The ongoing and escalating conflict between Israel and Palestine raises significant questions about the financial processes driving these contentious events and the extent to which cryptocurrencies are entangled in this complex situation.

What is cryptocurrency?

A cryptocurrency is a digital medium of exchange that employs encryption for the creation and verification of transactions. Bitcoin is the most renowned and the largest cryptocurrency globally by market capitalization.
Typically, cryptocurrencies operate independently from government regulation, serving as alternative financial means. Nevertheless, in September 2021, El Salvador marked a historic moment by adopting Bitcoin as an official legal tender.

Cryptocurrency in Geopolitics:

Russia-Ukraine conflict:

The war in Ukraine saw cryptocurrency playing a central role. Over US$ 212 million in crypto donations have flowed into pro-Ukrainian efforts, including US $80 million directly to the Ukrainian government. These funds have supported various war-related needs, from protective gear to medical supplies, thanks to the rapid and decentralized nature of cryptocurrencies.

Israel-Palestine conflict:

Similarly, unraveling the funding sources behind recent attacks by Hamas in Gaza has brought the role of cryptocurrency into the spotlight. Investigations have shed light on the substantial inflow of cryptocurrencies to groups active in the Israel-Palestinian conflict, including Hamas, Palestinian Islamic Jihad, and Hezbollah. These revelations have raised questions about the extent to which cryptocurrency is aiding these groups in their operations.
An extensive analysis unveiled that the Palestinian Islamic Jihad received an astounding US$ 93 million in cryptocurrency between August 2021 and June of this year. Meanwhile, Hamas managed to secure US$ 41 million in cryptocurrency funding between August 2021 and June 2023.

Hamas's Use of Cryptocurrency

In January 2019, Hamas, through its military arm, the Al-Qassam Brigades (AQB), began using cryptocurrency for fundraising. They launched a social media campaign to support their militant activities.
Initially, Bitcoin donations were modest, totaling only a few thousand dollars over a few months. They shared Bitcoin-related infographics and a donation address on social media, rapidly receiving about US$ 900 within a day, although the source of these funds remained unverified. Most donations were small, with a few larger contributions. They posted an additional Bitcoin address, accumulating over US$ 2,500 worth of Bitcoin in less than a week.
The move towards crypto assets may have been driven by the group’s search for alternative fundraising avenues, particularly in response to previous counter-terrorism financing measures targeting their use of traditional banking and money remittance sectors.
Hamas heavily relied on social media for outreach, particularly after their television station almost ceased broadcasts in December 2018 following Israeli Defense Forces airstrikes and financial crises. The cost-effectiveness of using social media for Bitcoin crowdfunding was a significant advantage.

Escalation in Crypto Donations

By July 2021, AQB’s wallets held millions of dollars worth of crypto assets, including Bitcoin, the Tether stablecoin, and other cryptocurrencies like Ether, Tron, and Dogecoin.
However, Israel identified 84 crypto wallets controlled by AQB, leading to orders for the seizure of the funds held within them. Subsequently, in April 2023, Hamas announced its decision to halt crypto donations, recognizing the vulnerability of using cryptocurrencies to fund their activities, as the transparency of the blockchain allowed for tracking illicit funds, facilitating the successful freezing of assets held by terrorist groups.
Around the same time, crypto transactions received by the Palestinian Islamic Jihad (PIJ), another US-designated terrorist organization in the region, also dwindled. This suggested that groups involved in the Palestinian-Israeli conflict had abandoned cryptocurrency as a fundraising tool, realizing the risk associated with its us

Funding Sources

Despite the economic isolation experienced by Gaza under Hamas rule, funding for these groups has come from multiple sources, including private donors in the Gulf region, with Iran being one of the prominent financial backers, providing an estimated US$ 100 million annually. Qatar and Türkiyé have also supported Hamas financially, further illustrating the multifaceted nature of these groups’ funding mechanisms.

Cryptocurrency and Terrorism Financing

The United Nations estimates that cryptocurrencies account for 20% of terror financing in the world. The recent seizure of the Hamas accounts has renewed scrutiny of cryptocurrencies.
The adoption of cryptocurrency by such organizations adds a layer of complexity to the challenge of terrorism financing, necessitating ongoing efforts to address this evolving landscape. More often than not, such transactions have a confusingly circuitous route.
increased use of cryptocurrencies in complementary and adjacent markets could indicate increased viability among terrorist organizations. Some counterfeiting operations have begun to use darknet markets, and there is a significant trade in illicit drugs and stolen identities in these market

Following the Money Trail to India

Intriguingly, an Indian crypto heist in 2022 unraveled a startling connection to Hamas. In its initial stages, the case revolved around the questionable transfer of cryptocurrencies—Bitcoins, Ethereum, and Bitcoin Cash—valued at approximately INR 30 lakhs, all originating from a cryptocurrency wallet in India.
As investigators ventured down the cryptocurrency rabbit hole, unexpected revelations unfolded. The trail led to wallets linked with the AQB. Intriguingly, some of these wallets had previously fallen under the scrutiny of Israel’s National Bureau for Counter-Terror Financing, leaving no stone unturned.
In a swift response, Israel acted decisively, freezing the cryptocurrency accounts tied to Hamas and channeling the funds toward the state treasury. Notably, while cryptocurrencies had been a favored fundraising channel for Hamas, the group, under increasing scrutiny, recently decided to halt accepting Bitcoin donations.

The Double-Edged Sword of Cryptocurrency

The intersection of cryptocurrencies and global conflicts has illuminated the dual nature of this innovative financial landscape. On one hand, the Ukraine conflict showcased the remarkable agility of crypto in enabling rapid emergency fundraisinbg and promoting the potential of decentralized finance, non-fungible tokens, and decentralized autonomous organizations.
However, this bright side is marred by the shadows cast by pro-Russian entities accepting crypto for potentially heinous purposes.

Conclusion:

The Israel-Palestine conflict is multifaceted, with deep-seated issues related to nationality, politics, territory, culture, and religion. As the world confronts these intricacies, the ongoing tug-of-war between security and innovation continues to advance. Cryptocurrency's involvement in global conflicts, while having its merits in enabling rapid fundraising, also poses significant challenges, particularly in the context of terrorist financing. This complex relationship between cryptocurrency and geopolitics underscores the need for ongoing efforts to regulate and monitor digital assets in the international arena.

Probable Questions for UPSC Mains Exam-

Question: How has cryptocurrency been used by Hamas and other groups in the Israel-Palestine conflict, and what were the outcomes of these efforts? ( 10 Marks, 150 Words)
Question: What were the reasons behind Hamas's decision to halt cryptocurrency donations, and how did Israel respond to the use of cryptocurrency in the conflict? ( 15 Marks, 250 Words)

Source – ORF / The Economic Times