Terrorist Financing with Tether
Cryptocurrency, private private partnerships, and future of counterterrorist financing
Ten years ago, when I first started looking at cryptocurrency and terrorist financing, the only currency used was Bitcoin. Terrorist financing through cryptocurrency was relatively rare and what I would describe as “proof of concept”. Within the last decade, the landscape has changed significantly, and terrorists are increasingly using cryptocurrency to move money for their financing needs. In fact, this is now the main way that terrorist actors move money (although banks, money service businesses, hawala, and trade-based methods are still popular). Along with the more widespread adoption of cryptocurrency, terrorists have diversified the type of cryptocurrency they use, increasingly using USDT (Tether). This article looks at the cases of Tether use for terrorist financing and interesting developments in countering the financing of terrorism through cryptocurrency.
USDT (Tether) is a type of cryptocurrency known as a stablecoin, which is designed to maintain a stable value by being pegged to a state-backed currency, typically the US Dollar. USDT is designed to have a 1:1 value with the dollar. Tether Limited, the company behind USDT, claims that each token is backed by reserves, including traditional currency, cash equivalents, and other assets. Initially launched on the Bitcoin blockchain, USDT is now available on multiple blockchain networks, including Ethereum and Tron. Tether has faced criticism over the transparency of its reserves, with critics questioning whether it holds enough assets to fully back the circulating USDT supply. Tether can be used on many different blockchains; until November 2024, the Tron blockchain hosted the largest amount of USDT. However, as of November, Ethereum blockchain is now leading blockchain for Tether, surpassing Tron.
(Sidebar: for an interesting discussion of stablecoins, their fungibility, and the network effects of the stablecoin market, have a read of this piece by JP Koning on his blog Moneyness.)
Tether is one of the main cryptocurrencies used for terrorist financing. Others include Bitcoin, Ethereum, Dogecoin, Zcash, and Monero. Terrorists often try to transact in cryptocurrencies with a lot of market share — this is how they hide the proverbial needle in the haystack. Tether, being one of the largest stablecoins, fits this bill perfectly.
The same features that make it attractive to legitimate users also make it attractive to illicit ones. This includes low transaction fees, a lack of volatility, and ease of use. Indeed, the lack of volatility of USDT is likely a main draw: while terrorists initially solicited donations in Bitcoin (many still do), the volatility of this asset makes it difficult to use for financing operational and organizational activities. For instance, at any given time, the amount of Bitcoin needed to purchase a weapon or improvised explosive component will change significantly. While this might be useful from a revenue-generating perspective, it adds logistical challenges to individuals trying to perpetrate an attack. They either end up needing to get more funds (if the Bitcoin initially transferred was too little to complete their purchases) or end up with a surplus and need to find a way to either return the money to the funder or accept that they’ve made a small profit from their activities. Tether is more straightforward: you can transfer the exact amount needed, and it maintains its value.