March 20, 2023 | Insight

Biden’s Opportunity to Stop Violent Extremists From Exploiting Cryptocurrency

March 20, 2023 | Insight

Biden’s Opportunity to Stop Violent Extremists From Exploiting Cryptocurrency

The Biden administration intends to crack down on crypto abuse by following a roadmap for regulation it unveiled in January. Calls for reform intensified after the crypto market’s tumultuous end to 2022, triggered by the bankruptcy of FTX, formerly the world’s second-largest crypto exchange. But as tough as Biden’s plan is, it misses an opportunity to target how domestic violent extremists (DVEs) use cryptocurrencies to fund and obscure their activities.

The thrust of the administration’s plan is to minimize customer risk. It recommends that Congress require greater disclosure from cryptocurrency companies on the potential risks of investment. And for any violators, the White House wants harsher penalties.

The roadmap also calls on Congress devote more money to law enforcement capacity building to monitor and respond to illicit activities using cryptocurrencies, like fraud, money laundering, and terrorist financing.

Although this is a step in the right direction, the Biden administration should grapple directly with how DVEs take advantage of cryptocurrencies to conceal criminal activities. New funding for law enforcement helps, but it does not address the specific tools and tactics that DVEs employ, such as so-called “privacy coins” and operating in foreign jurisdictions with deficient regulation.

DVEs were among the earliest adopters of cryptocurrencies as a means to fund their activities. But their use of these coins particularly spiked after the deadly 2017 “Unite the Right” rally in Charlottesville, as traditional payment platforms like PayPal and Venmo blocked many DVEs from their services. To keep their funding streams open, extremists flocked to alternative payment methods.

Cryptocurrencies were alluring because transactions are nearly anonymous, making it difficult for authorities to monitor and trace how these groups fund their illicit activities. Blockchain technology, the backbone of most cryptocurrencies, is what makes hiding in plain sight possible. Blockchain is a public ledger system that records digital transactions using a unique string of numbers and letters called a “key”— not a person’s name or other identifying information. While transactions are publicly visible, it is difficult to distinguish their purpose and the multiple parties involved.

Cryptocurrencies provide an effective way for extremists to mask their purchase of supplies, weapons, or encryption tools. In some cases, crypto donations have even funded the legal defenses of individuals associated with DVEs.

Extremists commonly acquire cryptocurrencies by soliciting payments or donations to produce DVE-related content on radio shows, podcasts, and live-streaming websites. For example, by using DLive, a video streaming site that enables content creators to generate revenue and solicit donations, some extremists accumulated hundreds of thousands of dollars in digital currencies annually. DLive is not a site for extremists, but its lax content regulation and ability to handle crypto transactions made it popular among DVEs.

While the crypto market was booming, such concerns remained peripheral. A year ago, FTX seemed like a permanent fixture in the industry, with 1.2 million registered users and a $32 billion valuation. But behind the curtain, FTX leadership was grossly mismanaging customer funds and neglecting financial safety measures, according to John Ray, who became CEO after the crash.

Days after FTX’s collapse, U.S. Treasury Secretary Janet Yellen said the cryptocurrency market demands “very careful regulation.” In December 2022, New York Stock Exchange President Lynn Martin also called for a clearer regulatory framework for digital assets.

Now, with the White House’s determination to lead the charge, policymakers in Washington have a golden opportunity for aggressive action against all who exploit crypto for malign purposes, including extremists.

While the White House’s customer-focused reforms are absolutely necessary, the administration should also take aim more directly at DVEs.

First, regulators could increase the visibility of digital asset flows on the blockchain to pull back the veil of near-anonymity that attracted DVEs to cryptocurrencies. To do so, policymakers ought to consider outlawing the use of privacy coins — i.e., cryptocurrencies that use temporary keys or divided transactions to become even more untraceable. If they refuse to ban privacy coins, regulators could at least encourage exchanges to delist them. Curbing the use of these coins may compel some extremists to shy away from crypto — and it could potentially leave them without a viable alternative.

Additionally, Washington could pursue the harmonization of international standards for government oversight of virtual currencies, which would require all national governments to implement reporting practices that publicize and track digital asset flows. This global system would discourage transnational extremist movements from conducting regulatory arbitrage and capitalizing on countries with weaker regulatory frameworks to fund their activities.

“Nothing spurs legislation like a crisis,” said Ron Hammond, director of government relations at the Blockchain Association, a hub for crypto oversight policy. By acting swiftly, policymakers can take advantage of the FTX crash to help everyday crypto investors with stronger oversight — with the added benefit of making digital assets less attractive for extremists who threaten public safety and democratic norms.

Varsha Koduvayur is a research manager at Valens Global, where she supports the project on domestic extremism at the Foundation for Defense of Democracies (FDD). Follow her on Twitter @varshakoduvayur.

Thomas Plant is an analyst at Valens Global and supports the project on domestic extremism at the Foundation for Defense of Democracies (FDD).


Blockchain and Digital Currencies Domestic Extremism