Crypto’s Role in Terrorist Financing

Every week, ISMG rounds up cybersecurity incidents in digital assets. This week, Chainalysis busted crypto terrorist financing myths, the Sam Bankman-Fried trial continued, Stars Arena got back 90% of its stolen funds, an EU authority warned about DeFi risks, the U.S. FDIC said it would focus more on crypto, and California’s governor approved crypto regulations.

See Also: Navigating the Regulatory Landscape: Rising GRC Trends and Data Breach Risks

Terrorists may actually not be avid cryptocurrency users, said Chainalysis. The company said Thursday that it has seen “overstated metrics and flawed analyses” on the topic, especially in light of many questions around the use of the digital asset by Hamas in its conflict with Israel.

The company said that terrorism financing is a “very small portion of the already very small portion of cryptocurrency transaction volume that is illicit.” While terrorist groups such as Hamas and Hezbollah do raise, store and transfer funds using cryptocurrency, traditional, fiat-based methods are their primary financing vehicles and will likely remain so.

The federal trial of former FTX wunderkind Sam Bankman-Fried is a Netflix series writing itself, revealing how fraud permeated an industry supposedly dedicated to creating an alternative, safer financial ecosystem.

This week, it was former top Bankman-Fried aide and FTX engineer Nishad Singh’s turn in the spotlight, telling a Manhattan jury that his former boss’s spending “reeked of excess,” The New York Times reported.

As a reminder: Bankman-Fried is on trial for two counts of fraud and five counts of conspiracy tied to charges that he shifted as much as $14 billion in customer funds from now-bankrupt crypto trading platform FTX to sister hedge fund Alameda Research. The former FTX CEO pleaded not guilty even as his inner circle turned state’s evidence against him. FTX also spent a fortune courting celebrities and politicians, allegedly all with customer funds. That famous FTX Super Bowl TV commercial featuring Larry David? Turns out the comedian received $10 million for it, reported Slate. Other beneficiaries of FTX’s largesse: $10 million for One Nation, a dark-money nonprofit aligned with Republican Senate Minority Leader Mitch McConnell. Bankman-Fried was bipartisan: Democrats received tens of millions from him in 2022. FTX promised $148 million to Major League Baseball for a multiyear deal “that would include both ‘sponsorship’ and ‘cryptocurrency integration.'” The company promised music festival Coachella $25 million over three years.

When Singh said he had pushed back on the spending, Bankman-Fried “got visibly mad” and told Singh it was “people like me sowing seeds of doubt in the company that are the real problem here,” Singh testified, The New York Times reported.

In testimony Thursday, FTX former General Counsel Can Sun testified that he had been told that customer funds were held separately from company accounts. “In all my conversations with Sam, it was always said that customer assets were “safeguarded, segregated and protected,” Sun said, TechCrunch reported. Sun signed a non-prosecution agreement.

Prosecutors are expected to rest their case on Oct. 25. Bankman-Fried’s defense team isn’t getting rave reviews, and multiple trial observers are wondering whether his attorneys have a plan. It turns out, they might not. “We are still working through whether we are going to put a case on and, if so, of what nature,” defense attorney Mark S. Cohen told U.S. District Judge Lewis Kaplan, of the District Court for the District of Southern New York, on Tuesday, New York Magazine reported. “I continue to believe that if we do put on a case, it won’t be more than a week, week and a half at the max.” If we do put on a case?

Maybe it will all boil down to whether the defendant is sufficiently stimulated. Bankman-Fried has been asking through his attorneys to receive stronger doses of Adderall. Cohen has written in court filings that a decision by Bankman-Fried to testify could hinge whether he gets more of the drug, which he previously took in dosages reaching 40 milligrams per day. The matter appears unresolved, CNBC reported on Monday, saying that Kaplan said, “I can’t have lawyers giving drugs to people on trial.”

Web3 social finance app Stars Area, which was the victim of a $3 million hack earlier this month, relaunched the platform on Sunday. It will not allow trading on the platform until the full audit is complete, the company said. The announcement comes on the heels of the hacker returning 90% of the stolen funds in exchange for a 10% bounty.

Decentralized finance poses “serious risks” to investors due to the highly speculative nature of many DeFi arrangements, important operational and security vulnerabilities, and the lack of a clearly identified responsible party, said the European Securities and Markets Authority. The ecosystem lacks trusted intermediaries, who could otherwise curb risks pertaining to stability and investor protection, the independent E.U. authority said. The report also discussed concerns about DeFi innovation and warned against the prevailing “code is law” principle in the industry’s governance. It suggested regulating smart contracts by separating them into categories to reduce complexity.

The U.S. Federal Deposit Insurance Corp. must do more to determine risks in the cryptocurrency industry, since its volatility will affect the financial institutions the organization oversees, according to a report from the Office of the Inspector General. It advised the FDIC to set up a process to supervise crypto activities at regulated institutions. The FDIC aims to follow the recommendations by the end of January.

California Gov. Gavin Newsom approved a bill that will impose stricter regulations on crypto businesses starting in July 2025, a Friday announcement said. The Digital Financial Assets Law mandates both individuals and crypto firms to obtain a Department of Financial Protection and Innovation license to engage in digital asset business activities, in line with California’s current money transmission laws for banking services. The legislation will enable the DFPI to impose audit requirements and record-keeping requirements such as assets, liabilities and capital. Those who fail to comply with the requirements will face undisclosed enforcement measures.