Cryptocurrency does not appear to be a significant trend in terror financing in the Middle East, but a new round of U.S. sanctions aimed at Syria may tip the scales in favor of experimentation.
"The Americans are pressuring the Bank of Lebanon to prevent it from putting enough dollars into the market,” Nasrallah said.
To date, evidence suggests terror groups like Hamas are using only small amounts of bitcoin, at volumes far smaller than what the civilian population in the region is using. In fact, the analytics firm Chainalysis estimates most campaigns by terror groups like ISIS have raised “less than $10,000” worth of cryptocurrency, less than a single Palestinian trader typically sells in a week.
Read more: Bitcoin in Emerging Markets: The Middle East
That said, among the most prominent terrorist organizations in 2020, Hezbollah in southern Lebanon is arguably the most likely to benefit from using crypto. (Hezbollah is classified as a terror group by the U.S. and 17 other nations. A number of EU countries do not classify Hezbollah as a terror group.)
Randa Slim, the Lebanese-American director of diplomacy programs at the Middle East Institute think tank in Washington D.C., said she believes Hezbollah is interested in bitcoin.
“No other party in Lebanon has the kind of access to financial resources nor the military infrastructure to be able to maintain its role. We’re going to see Hezbollah’s dominance over the political life of the country, and increasingly over the economic life of the country,” Slim said, referring to Lebanon’s current economic crisis.
Hezbollah’s power may be growing, but bitcoin doesn’t appear to be playing a significant role in that so far. Slim said she hasn’t seen any “focus in Hezbollah-affiliated media and publications on cryptocurrency” and “the money from Iran mostly comes in cash.” Likewise, an anonymous Lebanese bitcoiner said he hasn’t seen or heard anything related to both bitcoin and Hezbollah.
Iranian government officials have repeatedly made public statements in 2020 that they are interested in using bitcoin, without saying how they plan to deploy that capital. Considering their own economic crisis at home and raging stock market, there isn’t any evidence yet to suggest Tehran’s crypto strategy includes terror financing.
"Nasrallah frequently mentions that his group tries to avoid [cypherpunk] technology,” the anonymous Lebanese bitcoiner said, “because there’s an enormous asymmetry between them and Israel when it comes to such technology.”
Either way, Iranian funding is only a fraction of Hezbollah’s finances. Middle Eastern bitcoin experts, even those with ample reason to fear extremists, are generally less concerned with the risk of terror financing than their North American counterparts.
Beyond the fact Hezbollah leadership knows its longtime enemy Israel has more crypto resources, the Lebanese bitcoiner said if terrorists can get missiles they can certainly acquire bitcoin and operate their own systems.
In short, the possibility exists regardless of sanctions, which have primarily limited civilian access to global assets. As one Iraqi bitcoin trader, who also commented on the condition of anonymity, said with regards to the extremist threat in his homeland on the opposite side of Syria, the possibility of terror financing “is not a convincing reason for us to be afraid of [bitcoin].”
The Iraqi said the only way to deprive extremist groups of financial support is to address “the deteriorating economic situation” that “directly affects people’s living situation.” The Lebanese bitcoiner agreed.
“Hezbollah is able to maintain the majority of its influence by being able to provide for the most disadvantaged individuals in the country,” the Lebanese bitcoiner said.
In reference to how Hezbollah distributed American dollars to its supporters late last year, earlier in the Lebanese economic crisis, the bitcoiner said: “If people had a way to manage their finances in a truly decentralized fashion, what effect would that have on Hezbollah’s ability to buy loyalty with dollars?”
To that end, the Iraqi trader is optimistic about bitcoin's potential in the Middle East, especially places with weak nation-state structures like Lebanon and Syria's Rojava region. Lest we forget, American sanctions aren’t the only compliance issues in the region. Lebanese Christians and various Muslim sects, for example, may also face discriminatory obstacles and be attracted to bitcoin for this reason.
“I am confident that we are at the beginning of the road and that in the near future there will be a significant improvement,” the Iraqi trader said in reference to currency dynamics and “free trade” across the region. It's estimated hundreds of civilians across the Middle East use bitcoin to sustain themselves, although it’s not clear how many in total.
“A lot of people that are salaried employees are now using cryptocurrency,” the anonymous Lebanese bitcoiner said. “In that sense, I am grateful for cryptocurrency and think it can be very useful in those contexts.”
As of June 2020, there is more evidence to suggest fraud than terror financing in the Middle East.
According to the Washington Institute, a pro-Israel think tank, Hezbollah typically uses money laundering schemes, banking fraud and credit card scams to fund its operations. Such financial crimes are on the rise during the recession, more broadly speaking, even in the United States. Any such operations would not be unique to cryptocurrency nor Lebanon.
The most obvious illicit use case beyond run-of-the-mill scams would be Iran sending bitcoin to Hezbollah. By the most extreme estimates, such as the one published in 2019 by Israel Hayom, Hezbollah reportedly has a $1 billion military budget, out of which roughly $100 million worth of fiat is estimated to come from the Iranian government.
Local sources in Tehran said they haven’t heard of specific crypto exchanges working directly with governments for political transactions. The scale of terror financing, in particular between Iran and Hezbollah, would theoretically create a noticeable data surge in Beirut's and Tehran’s comparably small bitcoin markets. If Hezbollah is using bitcoin, it has done so without attracting local or international attention.
For broader context, the state of Lebanon, where Hezbollah represents a political party as well as an independent militia, is estimated to have an annual budget of $2.78 billion. Chainalysis estimates crypto terror financing across the region hovers around $1 million (for Hamas and ISIS, there’s not yet a comparable estimate for Hezbollah). As such, the blockchain sleuthing firm called this very “limited adoption.” Such cryptocurrency campaigns appear to be ineffective at best.
Based on public data about bitcoin usage in the Middle East, there’s no evidence suggesting significant trading volumes are devoted to financing Hezbollah. In short, neo-Nazis may be more likely to use bitcoin than Islamic extremists.
Meanwhile, the Lebanese banking system is on the verge of collapse.
Hezbollah reportedly threatened to storm Lebanese banks in 2019, when the group had trouble accessing funds. Tensions between the terror group and Lebanese central bankers continue to simmer. That sentiment is commonplace. Unaffiliated protests lit a central bank building on fire last week in Tripoli, Lebanon’s second-largest city.
Broadly speaking, bitcoin usage has become more widespread in Lebanon during this economic crisis. Considering most Hezbollah supporters are Lebanese, the Middle East Institute’s Slim said the group’s supporters are probably not an exception to local fintech trends.
People on the ground do not believe regulations deserve credit for the lack of terror financing. The bitcoin traders from Iraq and Lebanon said it is simply a matter of civilians finding bitcoin more useful than extremists these days. It remains to be seen whether cryptocurrencies offer a unique value to Hezbollah.
Plus, Lebanon’s overall electricity infrastructure may not be mature enough for a competitive bitcoin mining industry, not to mention the digital-literacy divide that limits local liquidity. The group faces mounting economic pressure because it also operates hospitals, schools and agricultural programs with dire needs during the coronavirus crisis.
Slim said sanctions have not reduced the overall financial support for groups like Hezbollah, merely diversified the ways these budgets are managed and deployed. Despite, or perhaps because of, the perfect storm of economic uncertainty, it appears Lebanon’s growing bitcoin market is driven organically, among civilians, not by institutions or extremist campaigns.
“It’s not something, in my opinion, the Lebanese government has the technical resources to focus on and monitor,” she said of bitcoin. “Whatever money Iran has devoted over the years to its regional projection of power, through proxies and alliances like Hezbollah … that pie, I don’t think it has expanded. There are now more demands for the money.”