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Jihadists Turn to Virtual Digital Money for Financing

FILE - Bitcoin tokens at software engineer Mike Caldwell's shop in Sandy, Utah, April 3, 2013.

Online appeals from the so-called Islamic State to wage jihad are nothing new. But now they're suggesting a very new tactic.

Virtual digital money is increasingly being promoted as a way for money-needy jihadists to support their efforts, according to intelligence agency and media reports.

Also known as crypto-currency, the trading method has rapidly grown in popularity since the introduction of Bitcoin in 2009. There are over 500 different currencies with an estimated total market capitalization of over $3.7 billion dollars.

But a portion of that growth, perhaps even a majority of it, has come from individuals using the digital dollars for questionable or illegal purposes and by groups who want to keep their activities out of view of governments.

And with the technological skills demonstrated by the so-called Islamic State, Boko Haram, al-Qaida and other groups, there are new worries that crypto-currencies may become a new, hidden way to funnel money to fund terror.

"This system has the potential to revive the lost sunnah of donating to the mujahideen," a blog post on a pro-IS website said last year, using the term for Muslim believers. "It is simple, easy and we ask Allah to hasten it's [sic] usage for us."

The post, titled “Bitcoin and the Charity of Violent Physical Struggle," urged supporters to back IS fighters in Iraq and Syria through donations using the digital virtual currency.

Virtual money world

Nearly every financial transaction these days at some point touches on the cyber world, and some services such as PayPal, seem to live almost entirely online.

A major difference, says Sarah Meiklejohn, a lecturer at University College London, is that nearly all of those ATM and PayPal-type services convert a stored digital value into traditional "fiat" currencies – such as the dollar, the renminbi or the ruble – which are in turn tightly control by centralized governments. Crypto-currencies like Bitcoin, she says, aren’t.

"The main difference is decentralization," Meiklejohn said. “Bitcoins are not generated by any single entity; the U.S. government is the only thing that can generate dollars, and [it can] dictate the supply. Also, the Bitcoin transactions are decentralized as well, and the entire peer-to-peer network is responsible for bearing witness to the transaction."

The currency part of Bitcoin is fairly straight forward - users exchange coins to buy and sell goods and services. Bitcoin is now accepted as payment at thousands of small business around the world, and increasingly at multinational firms such as Microsoft and Expedia.

The "crypto" part of Bitcoin and other alt-coins is that user identities are "pseudonymous," meaning they’re visible only as a string of numbers and characters, thus granting users relative anonymity in their purchases and shielding many of the transactions from government view.

Pseudonymous, maybe not anonymous

But Aaron Brantly, a cybersecurity researcher at the Army Cyber Institute at West Point, is quick to point out that pseudonymous does not equal anonymous.

"Bitcoin is not anonymous. In fact, it is the opposite of anonymous," he said via email to VOA. "The transfer of BTCs from one point to another are tracked but the individuals engaging in those transactions are not. However, with repeated transactions the anonymity of the user is diminished in much the same way that your shopping habits with cash lose anonymity if you shop at the same store over and over. You will be recognized."

This pseudonymous nature of Bitcoin is the main reason its rise was so often tied to the now-shuttered Silk Road, a Darknet market where users could purchase illegal drugs or other illicit services. And it’s also a main reason that governments around the world view crypto-currencies – and the rapid growth of encrypted digital devices – with a wary eye.

So far, only six nations have banned the use of Bitcoins, but many nations restrict how and where they can be used. Bitcoin use in the U.S. is legal, but the Internal Revenue Service officially classifies it as "property," not currency, that is subject to taxation.

The Obama administration has been outspoken about the need for government entities such as the National Security Agency to have encryption back doors, allowing access to the digital communications and activities of suspected criminals and terrorists.

Federal Bureau of Investigation Director James Comey has repeatedly warned about the dangers of encryption, saying it allows terrorists to "go dark," making surveillance impossible

"If the challenges of real-time interception threaten to leave us in the dark, encryption threatens to lead all of us to a very dark place," Comey said In a 2014 speech.

Not so anonymous

The Combating Terrorism Technical Support Office at the U.S. Department of Defense wrote in a memo last year: "The introduction of virtual currency will likely shape threat finance by increasing the opaqueness, transactional velocity, and overall efficiencies of terrorist attacks."

"I do think it’s certainly possible," said cryptography lecturer Meiklejohn. "The thing I would say, though, is that in its current state, Bitcoin is just not very usable, especially for a group like the Islamic State."

A person might be able to order take-out in London or contribute to a political campaign in California using Bitcoin, but Meiklejohn said there just aren’t that many places that accept crypto-currency.

Adding to that, the currencies are still very complicated, said Brantly, the researcher at West Point.

"Your average jihadist computer user would find Bitcoin or other similar currencies rather difficult to use and even more difficult to understand," he said via email. "Specialized skills and training are required to maintain anonymity over the long term."

Skill required

While crypto-currencies can offer highly skilled users a degree of anonymity, a 2013 study by Meiklejohn said it can easily be lost.

"Bitcoin can offer fairly good anonymity, but most users don’t have that, whether out of ignorance or the fact that they just don’t care," she said.

The study documented a number of ways Bitcoin users lost or discarded their anonymity. For example, transactions easily can be tracked among users who store their digital wallets in the cloud.

Far from being a boon to terror groups, crypto-currencies might expose them to much greater surveillance and scrutiny, Meiklejohn said.

"If you get a lot of unskilled users engaged in these transactions, you’d really be doing law enforcement a favor," she said. "Because you would have people switching away from traditional transactions like Western Union or cash, that are essentially impossible to trace, into something where you’re actually potentially giving law enforcement a lot of information, whether you know it or not.

"That actually that would be a positive development, if you’re looking at it from a law enforcement angle," she said.

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    Doug Bernard

    Doug Bernard covers cyber-issues for VOA, focusing on Internet privacy, security and censorship circumvention. Previously he edited VOA’s “Digital Frontiers” blog, produced the “Daily Download” webcast and hosted “Talk to America”, for which he won the International Presenter of the Year award from the Association for International Broadcasting. He began his career at Michigan Public Radio, and has contributed to "The New York Times," the "Christian Science Monitor," SPIN and NPR, among others. You can follow him @dfrontiers.