Coins for Bombs: Increased Transparency of the Global Financial System - Evidence from Terrorist Attacks Financing Detection in Blockchain-based Currencies

Abstract

The proliferation of blockchain-based cryptocurrencies, which essentially use public accounting ledgers, has two opposing effects related to the global financial system's transparency. On the one hand, governments, market regulators, and financial institutions make significant efforts to curtail the financing of illicit activities that cryptocurrencies may be able to circumvent. On the other hand, funds and transfers that used to be known only by the involved parties are now transparent to anyone with knowledge of blockchain and accounting. This study empirically examines whether it is possible for outsiders to identify evidence of financing international terrorist attacks on public blockchain systems. We do so by utilizing empirical strategies based on accounting and finance literature, forensic accounting, and machine learning algorithms on millions of cryptocurrencies' transfers. We provide evidence that blockchain-based cryptocurrencies are used to finance terrorist attacks. However, the blockchain ledger underlying transparency also enables outsiders to identify the fund trails and predict terrorist attacks.

Keywords: Financial Regulation, Terrorist Financing, Economics of Blockchain, Forensic Accounting, Bitcoin, Ripple

JEL Classification: G15, G18, G29, K29, K42, O16