Hamas just learned a brutal lesson about bitcoin. Can senators also learn it?

After Hamas’s brutal surprise attack and massacre of Israeli civilians, policymakers are searching for the most effective ways to fight terrorist organizations. They can take an important lesson from something that recently happened to Hamas when it tried to use bitcoin to finance its operations.

Hamas thought it could flout Western surveillance and international sanctions by embracing the world’s leading digital asset. It thought wrong, and the story is illuminating for those who mistakenly believe that bitcoin provides a safe space for criminals, money launderers and the financiers of terror. 

Earlier this month, Israeli law enforcement successfully located and froze multiple cryptocurrency accounts that Hamas had used to solicit donations. Israel then funneled the assets into its own treasury — the same treasury that is funding the war to wipe Hamas “off the face of the earth.” 

The terrorist organization’s crypto scheme backfired badly, and this wasn’t even the first time it had backfired this year. In April, Hamas begged supporters to stop sending donations via bitcoin, specifically. In a surprise press statement, it announced it was suspending bitcoin donations “to ensure the safety of donors and protect them from any harm.” The terrorist network cited “the intensification of prosecution and the redoubling of hostile efforts against anyone who tries to support the resistance through this currency” as the logic behind this decision.

So what happened? Isn’t bitcoin ideal for money laundering? Isn’t it the preferred currency of terrorists and criminals the world over?

Quite the opposite. Hamas discovered all too late that making illegal transactions in bitcoin is a financial suicide mission. That’s because the open, transparent nature of the blockchain is a panopticon for intelligence agencies, allowing them to track transactions in real time with a speed and precision that would be unthinkable in the world of fiat currency. 

Unlike paper money or computer files, the bitcoin blockchain is permanent, transparent and immutable. This means that each network transaction, whether it’s worth a few cents or millions of dollars, becomes fossilized on the blockchain like a prehistoric bug in digital amber.

These fossilized transactions include every donation to Hamas ever made through this medium. All law enforcement has to do is connect a transaction with a wallet and a wallet with an identity —a task which, in practice, it has had little difficulty doing.

It is for that reason that illicit activity makes up such a small fraction of transactions in the cryptocurrency space — about one quarter of one percent, according to a study by analytics firm Chainalysis. That is an especially small amount when compared to the 2 to 5 percent of fiat currency transactions attributed to money laundering and the like, according to United Nations data. 

In other words, if you don’t like what certain people do with bitcoin, you are going to hate the U.S. dollar. 

It’s an important lesson that certain lawmakers in Washington have yet to learn. And unfortunately, some of them are not open to learning facts that contradict their preconceived ideas.

Sen. Elizabeth Warren (D-Mass.), who openly boasts of raising an “anti-crypto army,” talks about cryptocurrency as if it were terrorist blood money. She remains heedless of countless examples where Western intelligence has leveraged the public nature of the blockchain to choke off illicit financing. This includes not only the most recent example with Hamas, but also 300 crypto accounts the Department of Justice seized to throttle funding for terrorist groups like al-Qaeda and ISIS. She might also find illuminating the recent high-profile criminal prosecution of a Manhattan rapper and her husband, who were easily caught when they tried to launder billions in stolen bitcoin. Again, it was the transparency of the blockchain that exposed them.

Warren’s bill, the Digital Asset Anti-Money Laundering Act, aims to solve a problem that no one has. It that would classify nearly all crypto industry participants — from wallet providers to miners to validators — as financial institutions, subjecting them to the onerous compliance regime of the Bank Secrecy Act. Under this bill, a teenager running a bitcoin mining rig in his basement could be subject to the same compliance burdens as JP Morgan Chase and Goldman Sachs.

But wallet providers, miners, and validators are not banks. They do not hold custody of assets. They certainly should not be collecting or storing the sensitive personal financial information of individual users of an asset. They merely provide infrastructure — the open-source software and computing power to help secure the network. Much like Microsoft, which also supplies a lot of software and cybersecurity products to financial institutions, they are not financial institutions. 

It would be impossible for the industry to comply with Warren’s requirements, and she knows this. The point of her bill is not to improve national security or stop money laundering, but to kill digital asset innovation.

Instead of participating in Warren’s farce, Congress should seriously explore how to help federal law enforcement crack down on actual illicit finance. The Financial Technology Protection Act — a bipartisan bill introduced by Senators Ted Budd (R-N.C.) and Kirsten Gillibrand (D-N.Y.) — is a critical first step in that direction. It creates a working group to study and report on how terrorists actually use new financial technologies to advance their missions and ways Congress and regulatory agencies can combat them. Congress could take its findings and construct a regulatory regime that addresses actual risks, not imaginary ones.

This would help deter criminal activity such as money laundering while still preserving the ethos of personal freedom that has long defined the digital asset industry.

Terrorists and criminals — from Hamas and Al-Qaeda to the early drug runners of Silk Road — learned the hard way that bitcoin is not ideal for illicit finance. Lawmakers across the country have yet to receive the memo. So we’re circulating it today and asking that they adjust their policymaking accordingly.

Jason Les is the CEO of Riot Platforms, Inc., the largest publicly traded bitcoin mining enterprise in North America by market cap. Brian Morgenstern is Riot’s head of public policy and was a senior adviser and deputy assistant secretary of the Treasury from 2017 to 2020.