Sign In
Virtual Assets: Characteristics and Risks
Financing is the lifeblood of terrorist organizations and groups which utilize all possible means to get it. Cryptocurrency has become an alluring source of financing for these organizations given all the advantages it provides, such as confidentiality, escape from government oversight, and ease of conversion.

More than 2,000 cryptocurrencies have emerged all over the world, most notably Bitcoin, Litecoin, Ether and AUS, some of which are issued by official banks, while others are issued informally, in addition to those issued by specific networks. The prices of these cryptocurrencies range between one cent to more than $50,000. Cryptocurrency goes back to 1993, when mathematician David Chum invented the first “encrypted” digital currency. The “Liberty Reserve” website allowed users to convert dollars or euros into a digital currency that could be exchanged freely in return for a percentage of fees. However, the US government shut down the website after finding out that this digital currency was used in money laundering and terrorist financing.

On 3 March  2022, at its headquarters in Riyadh, IMCTC held a lecture entitled “Virtual Assets and their Key Risks”, delivered by Dr. Salem Bahammam, governance consultant and trainer. The lecture addressed the characteristics and risks of virtual assets, provided examples of ways in which they are used by terrorist groups, and displayed statistics on their exploitation of these assets.

Bahammam reviewed the relevant international criteria and recommendations on virtual assets, the best practices to comply with such international criteria to combat terrorist financing, and the relevant Anti-Money Laundering practices.

He also provided various definitions of virtual assets (digital currencies), including the definition of the Financial Action Task Force (FATF) as “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representation of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations”. The European Banking Authority has described virtual assets as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically”.

Characteristics and Risks
Given their unrestricted global spread, Bahammam examined the characteristics of global virtual assets, such as their secrecy, which makes them difficult to track or monitor, the ease of conversion without an intermediary, the low fees required, and the impossibility of confiscating or freezing them. These characteristics have added greatly to the risks of virtual assets, most serious of which is using them to finance terrorist operations, money-laundering, drug and arms trafficking, tax evasion, as well as significant fluctuations in their market value and the inability of all entities to control them, which increases their risk on the global financial system. 

Terrorists’ Exploitation of Virtual Assets
Azim Abdullah, an ISIS member, did not need much money to set up a website for ISIS. All he needed was complete secrecy. Thus in 2014, he decided to turn to Bitcoin and pay just a little over the price of one Bitcoin, approximately $400 at the time, to register the website domain. He asked website visitors to help pay what he called a “website maintenance cost” using a Bitcoin. Sending donations in cryptocurrency that hides the identity of the donors within a series of symbols and numbers made it difficult for banks or law enforcement authorities to track such funds; thus, it has become easy to use cryptocurrency to finance terrorism.

An al-Qaeda network, which has been tracked by the US government, received more than 15 Bitcoins, estimated at thousands of dollars in 187 operations from 5 February 2019 to 25 February 2020. A member of Ghost Security Group, a counter-terrorism organization, confirmed that Bitcoin has accounted for between 1% and 3% of ISIS' total income (i.e., between $4.7 million and $15.6 million).

Criteria and Recommendations
The lecturer demonstrated the international criteria and recommendations regarding virtual cryptocurrencies, including FATF Recommendation 15, which called on countries to regard virtual assets as property, proceeds, or funds, apply relevant measures, assess and understand the risks emerging from virtual asset activities, require Virtual Asset Service Providers (VASPs) to be licensed or registered, ensure VASPs are subject to adequate regulation, supervision, and monitoring, ensure that there is a range of proportionate and dissuasive sanctions, and rapidly provide the widest possible range of international co-operation and necessary information exchange.

The Council of Arab Central Banks and Monetary Authorities Governors recommended that financial institutions and supervisory bodies, such as central banks, establish active governance and risk management structures. To this effect, some Arab and Islamic central banks issued a number of resolutions, including the following:
  • ​Prohibition of the use of encrypted assets by banks and individuals;
  • Declining crypto-assets for official business transactions;
  • Punishing traders who work with crypto-assets, in accordance with the AML Act;
  • Declining crypto-assets as a legal tender currency;
  • Warning against transactions of crypto-assets for their high price-fluctuation risks;
  • Warning against the risks of using crypto-assets for money laundering and terrorist financing.
Arab central banks advocated striking a balance between the benefits of issuing digital currencies and the problems and hazards that come with them, as well as the necessity for thorough review and selection of the best and most appropriate design for central bank-issued digital currencies. They also emphasized the significance of developing legal and regulatory frameworks as well as identifying other requirements for the successful issue of such currencies.

Best Practices
Bahammam explained the best practices to comply with international CTF and AML criteria relevant to virtual assets; most importantly, communication and awareness programs to educate the public and providing information on virtual assets and relevant risks, given the lack of verified information and the dissemination of unreliable data over the internet. He also called for legal review in order to create a legal environment that regulates currencies issued by banks and for devoting attention to training since virtual currencies operate in a high-tech environment that accommodates highly capable and efficient teams.

Technological Determinism
In the discussions following the lecture, Pakistan's IMCTC delegate inquired about the impact of the fluctuating prices of virtual currencies on their future. Bahammam replied that money launderers and terrorism financiers are not afraid of a decline in the value of virtual currencies after purchase. They are willing to sacrifice a portion of the money in exchange for laundering their money, legalizing and formalizing it.

Dr. Mohammed Al-Sebeih, KSA communications representative, addressed the issue of technological determinism and the need to adapt to the technical transformations and positively guide their use, given that the issuance of virtual currencies by official state banks minimizes recourse to illegitimate ones. KSA and UAE have agreed to launch a joint cryptocurrency under the name (Aber). Project Aber was started as an innovative project by the central banks of the two countries, and it is one of the first worldwide central bank experiences in this domain. This initiative aims at reinforcing the concept of central banks issuing cryptocurrency, as well as understanding and studying the relevant aspects, actual application of Distributed Ledger Technology (DLT), and dealing with these techniques directly in financial transactions across KSA and UAE banks in a way that ensures shorter processing times and lower costs.
5/30/2022 8:46 AM