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Off Chain 10/19/23: What Role is Crypto Really Playing in Terror Funding?
287 Plays1 year ago
In this week's episode, we discuss the u-tun made by Reddit on their blockchain-based community points system, plus we discuss the recent headlines surrounding crypto's role in the Isreal-Hamas conflict, and where they're being overstated.
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Transcript
Welcome Back and Crypto Headlines
00:00:12
Speaker
Hello and welcome to the Decrypting Crypto Podcast. It's October 19th, 2023, and this is Off Chain, your weekly recap of the biggest stories in the crypto space. I'm Matthew Howes-Barbie, and as always, I'm here after maybe a two, maybe even three-week hiatus. We've both been really busy, but we're back. I'm back with Austin Knight. How you doing, Austin?
00:00:34
Speaker
I'm good, Matt. I made it all the way back from Brazil, took a stop in NYC for a bit, and I'm back home, and I just couldn't be more pumped at the news when I got home that the BlackRock ETF was approved. That's the best thing. I honestly, I can't believe that my comments in the private telegram group with the Cointelegraph team actually paid off, and they tweeted about it.
00:01:02
Speaker
It's pretty amazing, you know. I just wanted to liquidate a bunch of people. That was my motive, really, in all ways.
BlackRock ETF False News and Market Impact
00:01:11
Speaker
For any of you listening, you may have noticed on Monday that there was quite a nice little rally in Bitcoin. Well, this was because the highly esteemed media publication Cointelegraph incorrectly reported that the BlackRock ETF had been approved.
00:01:31
Speaker
which it had later came out that their source was from some guy in a telegram chat, you know, as all great sources are found. But wow, it's been a
00:01:47
Speaker
It's been, you know, an eventful few
Rising Mortgage Rates and Housing Challenges
00:01:51
Speaker
weeks. We've got the ongoing soap opera of the FTX, well, SPF trial, which surprisingly we're not going to dig into today, but we promise you all, we're going to do some digging into that.
00:02:09
Speaker
markets have been pretty wild outside of crypto. I think the 10-year treasury yields just about hit 5% as we speak. And you know, I was looking not to sidetrack too much here, Austin, but I was looking because today
00:02:29
Speaker
the 30-year fixed rate mortgage rate in the US has just hit 8%, which is wild, right? And I thought, you know, I'm just going to have a little look at the time series of this mortgage rate. And I found something pretty unbelievable, right? So in the past 33 months, right, it's like just over two and a half years,
00:02:55
Speaker
the average like 30 year fixed rate mortgage in the US has gone from being the lowest rate in over 50 years, in Jan 2021, to being the highest rate in 23 years, which is now. What an unbelievable high and low in such a short period of time. It's unbelievable. I can't even imagine if you're like a
00:03:21
Speaker
first time by trying to get on the housing market in the US right now, it's basically just not possible. Yeah. Well, I promise you that we're going to have a soft landing, Matt. I mean, that's what they keep saying. Thanks, Mr. Powell. Yes. And we also will not have a recession because every time that we get into a recession, we'll just change the definition of what a recession is and it'll all be fine.
00:03:46
Speaker
Well, you know, that's the American dream. That's what I hear. Anyway. Yeah, well, it's a roller coaster ride out there. Oh, and, you know, we're also maybe on the verge of World War III, so at least there's some sort of lining in this. On a slightly lighter note, let's jump into our first story of the day.
Reddit's Crypto Points Shutdown
00:04:15
Speaker
Reddit has faced some pretty steep kind of criticism and is now coming under fire a little bit because the, you know, the big crypto advocate Reddit that had been doing a ton of great stuff. They've been launching all their NFTs. They have been taking a look at their community point system onto the blockchain.
00:04:42
Speaker
Well, they're shutting it down. They are killing their crypto community points tokens. And that is happening in less than a month. It's kind of shocked a lot of the Reddit community. And why is this important? Why are we talking about this? So Reddit launched this community point system back actually in like May 2020.
00:05:08
Speaker
And this was a big deal because they were ERC-20 tokens. They were on the Ethereum blockchain and they were held inside Reddit's non-custodial crypto wallet. That's the Reddit vault if you've ever used it. And you could redeem these tokens or transfer them out of Reddit and trade them, right?
00:05:27
Speaker
for perks on Reddit, like badges, emotes, GIFs, like other features, a bunch of other stuff. And Reddit was like really widely praised for doing this. They were an early adopter. They were a supporter of the blockchain space. And this was actually prior to just like the insane NFT bonanza that happened later that year. So they were really, they were doing a lot to push the technology forward.
00:05:53
Speaker
And the whole focus of this was to reward contributors on their platform. I thought it was great. The point system will now be sunset on November 8th. And it was interesting because Reddit, the exec team, and some of their PR team came out and they said, though the moderator, this is a quote, though the moderators and communities that supported Community Points have been incredible partners, as it's evolved, the product is no longer set up to scale.
00:06:21
Speaker
And then they went on to add the resourcing needed was unfortunately too high to justify and I think this is the most important piece.
00:06:29
Speaker
the regulatory environment has since added to that effort. So I think it seems like the added pressure coming from the SEC and the US is a big driving force behind Reddit actually sunsetting this program. And what you and I are no doubt will be privy to here, Austin, is that very publicly, Reddit have been in the long process of packaging up their company for an IPO. So I imagine this is playing a big role in that.
00:06:59
Speaker
Now there's been a lot of backlash and all this, but I think a lot of the community feels like the rug's been pulled under them. The key thing here is that off the back of this, several subreddits had launched their own tokens off the back of the community points being launched.
00:07:19
Speaker
Not only that, Reddit only recently did this massive migration, I think we covered this on the podcast earlier this year, onto the Arbitrum, on Arbitrum's Nova blockchain, which I think was like one of their side chains. So they did this huge migration, loads of work involved, it was a huge boon for the Arbitrum ecosystem.
00:07:39
Speaker
and then you have the subreddit our cryptocurrency which has their moons token and then our fortnite br which has its bricks token and then i think there's the eth trader subreddit which has much smaller token and donuts
00:07:54
Speaker
These bricks and moons in particular have been listed on major exchanges. There's been like a lot of fanfare around them. This announcement went out, I think it was yesterday or no, maybe it was Tuesday night.
00:08:10
Speaker
And yeah, those tokens have just sold off heavily. They're down like 60%, 90%. And what Reddit have said is that these tokens will no longer be visible in the Reddit vault wallet. But transfer functionality seems to remain for users. What a lot of questions are coming out is like, what is Reddit going to do with
00:08:36
Speaker
the community points, like smart contracts, they're going to send that to like a burn address. Like how there's a lot of uncertainty. And I think what a lot of people are going to be paying close attention to is to see what Reddit will be doing with their NFT or should I say digital collectibles after all of this, because they have launched a lot of those and they haven't mentioned those as part of this, but clearly all related. So.
00:09:01
Speaker
I would say a step back in progress for larger mainstream adoption. I mean, mainstream is maybe a big word for Reddit. I don't think there's anything mainstream about Reddit, but at least a non-crypto-native large community adopting it. What's your take on this, Austin? Feels very regulatory driven.
00:09:23
Speaker
It definitely does. And I think that in that respect, this is just one more unfortunate casualty of the unclear regulatory environment that we've been facing for years at this point.
00:09:42
Speaker
But I still do kind of question Reddit's approach to this. If I understand correctly, Matt, when they say that community points are going to be completely sunset, does that mean that basically if you have a bunch of community points, they're going to completely go away and
00:10:01
Speaker
you can't convert them to anything, you can't redeem them for anything. What's that going to look like for people that really bought into the system and shouldn't Reddit have some type of way to convert it into something that maybe isn't a token but is some other
00:10:16
Speaker
you know, even piece of value on the platform. I assume they're going to do something like that. But that's where a lot of the uncertainty is. It was very vague, right? Because I'm going to assume there's some kind of like, they're just going to pull this back into like traditional karma system or something like that. But it was very vague, people were kind of confused by it, like, are these just going to get but I mean, the whole
00:10:41
Speaker
overhauling any kind of reward system is a huge, huge task to literally sunset something is, yeah, in a community, it's a very, very challenging thing to do, irrespective of whether this is crypto. So it does leave a lot of people, and especially those subreddits that kind of launch these tokens, really,
00:11:07
Speaker
being pushed by reddit as well scratching their head wondering like you know surely they knew a lot of the risks going into this they were a first mover they knew what they were getting themselves into i definitely don't buy the resourcing kind of
00:11:25
Speaker
excuse though, which is too many resources, et cetera, et cetera. Well, you know, you're still going to have a community rewards and points team somewhere. I just don't buy that they would, I think the sun setting job would be an even bigger one, to be honest.
00:11:42
Speaker
Yeah. We'll have to see how this comes out. To me, this is a big bummer. I know that you said, oh, Reddit's not like this mainstream thing. I think it's a pretty mainstream platform. I mean, it's one of the highest trafficked sites on the internet. It's a huge, huge app with huge amounts of dials, very engaged users. The day that my wife downloaded the Reddit app onto her phone, I was like, OK, it's mainstream at this point.
00:12:09
Speaker
Yeah. So to see this, you know, kind of for them to backpedal on what was, you know, at the time when it was announced, a really exciting announcement for broader adoption in the space, especially the fact that they weren't calling these things, you know, tokens and NFT. And they were they were, you know, making it a little bit more palatable to the average person. And and it was less about the technology and more about the utility. That was exciting. So it's a bummer to see where this has ended up.
00:12:39
Speaker
Yeah, for sure. We'll keep an eye on it. I'm interested to see how they manage this whole process. And I'm sure there's going to be a few additional steps of controversy that crop up. But anyway, speaking of controversy, let's dive into our second story of the day.
Crypto in Global Conflicts: Impact and Skepticism
00:13:02
Speaker
If you listen to this podcast regularly, if you're involved in the space, a question that you've probably gotten a lot recently is, hey, what's going on with that thing with crypto potentially being involved in the Israel-Palestine-Hamas conflict? Did Hamas actually use crypto to fund its attacks? These are things that you've probably been hearing from people that are less involved in the space lately. They're curious because they're hearing in media
00:13:31
Speaker
and from politicians that crypto is being used to fund the conflict. In fact, on Wednesday, a bipartisan group of 29 US senators and 76 representatives led by senators Elizabeth Warren and Sherrod Brown sent a letter to President Biden's top advisors, one demanding answers as to the role
00:13:53
Speaker
played by crypto and sponsoring the attacks on Israel. And two, they pushed the White House on plans to prevent crypto finance terrorism in the future. Now, it is true that Hamas has used crypto as a funding tool since 2019. But the question is how much of a role and really what role is crypto actually playing in this conflict? It's been interesting to see this unfold recently
00:14:23
Speaker
A group of analysts who track Hamas funding have begun to push back as some of the data as to crypto's role in funding the conflict has started to show that crypto actually isn't playing that large of a role and it doesn't pose a greater threat to safety than other forms of banking. I think that's the key piece, right? That's the key piece, right? It's like crypto doesn't pose a greater threat to safety than other forms of banking. I know we're going to dig a little bit more into this, but
00:14:53
Speaker
The fact that we are saying analysts who track Hamas funding, right? Like crypto has to be one of the easiest forms of funding to track because it is literally on a decentralized public ledger. And I think like the notion that people have that especially a few steps removed from the technology is that you can just
00:15:20
Speaker
get something on the blockchain and it's super secret and it's like cash under the mattress and it just couldn't be further from the case. It's the reason why when we talk about things like the Lazarus Group in North Korea, we can track pretty much
00:15:41
Speaker
to the exact amount, how much they have taken and how much they currently own and what they're doing with it. Now, can we stop it? Now, that's a little bit more challenging and there are things that can be done. But I think that there's just like this mixture of crypto is definitely a form of
00:16:05
Speaker
A form of funding that is more ripe for being exploited as in like we've seen major kind of cyber terror groups actually like exploiting smart contracts and other areas to steal crypto.
00:16:23
Speaker
Is it a wonderful and like super secretive form of funding? I think they're two very, very different things. I just want to call that out because I think it gets mixed together, which is just like the age old, like Bitcoin is only used by criminals kind of mantra that's spewed out.
00:16:40
Speaker
Yeah, yeah, absolutely. So let's unpack these two statements around the data showing that crypto isn't playing a large role, and then the fact that crypto doesn't pose a greater threat to safety than other forms of banking. So Ari Redboard is the global head of policy at TRM Labs. If you're not familiar with TRM Labs, it's a blockchain intelligence firm that tracks crypto-related crime. And he said, quote, crypto makes up a very, very small part of a much larger fundraising picture when it comes to Hamas.
00:17:08
Speaker
TRM tracks and analyzes data from potentially crime affiliated digital wallets on blockchains, which as we all know are public immutable ledgers that record crypto transactions as Matt was sort of unpacking here. That transparency makes it easier for law enforcement to identify wallets and get the centralized crypto exchanges to freeze funds than it is for them to monitor and control traditional banking accounts, right?
00:17:35
Speaker
In fact, American and Israeli officials have seized funds in hundreds of crypto wallets associated with Hamas already. This has been going on for quite some time. And Ari continued to say, quote, you can't do that in the traditional world where you're seeing networks of Hawalas and shell companies and bulk cash smuggling going on. If you're not familiar with what Hawala is, it refers to an informal method for transferring money without moving any funds. This is something that's been happening for
00:18:05
Speaker
millennia. And in fact, this is backed up by former CIA director Michael Morrell, who previously called Bitcoin, quote, a boon for surveillance that should be embraced by governments around the world. Ari continued to say, quote, there are illicit finance risks in every financial system, but there's no talk about taking down the banking sector because banks are being used to transfer funds to Hamas.
00:18:31
Speaker
We've seen this outside of this conflict, right? I mean, how many times have we heard
00:18:41
Speaker
major bank has been found to fund terrorist organization X, right? We had the HSBC scandal with the Mexican drug cartels not that long ago. Not a whole lot got done about that. And I would argue it's much easier for someone to make a case for shutting down a public company than it is to shut down a form of technology. So I think there's just this double standard. And I think it is important
00:19:08
Speaker
Very important that we look critically, I think, not rose-tinted glasses into this because if cryptocurrency is being used in a very significant way to fund terrorist organizations or other kind of militias, whatever, inside and outside of this particular conflict, things need to be done about that. But the great thing about this is there are ways that we can keep tabs on this. There are ways and actions that we can take that are
00:19:39
Speaker
available to us in ways that in the traditional financial sector are not. And what we see is much more transparency versus this opaqueness that happens behind closed doors.
Crypto's Role in Terror Funding Debates
00:19:49
Speaker
Absolutely. I mean, there's no question that crypto is being used to fund terror organizations like Hamas in the same way that the traditional banking sector is being used to fund terror organizations like Hamas. The question is, what is the role? How big is the role? And as a result of that, what is the appropriate response? Sheila Warren, the CEO of the Crypto Council for Innovation, which is a lobbying group,
00:20:15
Speaker
said, quote, it's not US-based exchanges that are the problem. It's offshore. And the more you offshore this technology, the more you're opening up the aperture for terrorists to use it. That's just a fact. And I think that's a really good point. The point that she's making here is, you know, it's not Coinbase that's being used to fund Hamas. It's small exchanges that are either knowingly or unknowingly, but, you know, regardless are not being regulated.
00:20:44
Speaker
That's the key piece. That's the key piece. Yes. They are either knowingly or unknowingly being used as a vehicle to transfer these funds. And they're offshore. And because they're offshore, the US can't regulate them. We can't do anything about it. The more that we make it harder to operate in the US, the more we encourage exchanges to operate offshore. And then we have no ability to control these exchanges where funds are being funneled to Hamas. And that's the irony.
00:21:11
Speaker
That's the irony of it. Exactly. Ironically, Elizabeth Warren is making an argument against her own policies here. And by the way, whatever the role that crypto is playing in funding Hamas, I would wager a sizable bet that it is nowhere near the multitude
00:21:30
Speaker
of unfreezing $6 billion of US assets and giving them to Iran. So maybe that's what Elizabeth Warren should be focusing her time and attention on a little bit more is the $6 billion that we're unfreezing for the Iranian regime. But I guess that that's not very politically advantageous for her.
00:21:55
Speaker
So, there was an interesting chain analysis. I love this data analysis group. They came out with a report titled, quote, correcting the record, inaccurate methodologies for estimating cryptocurrencies role in terrorism financing. And this really gets at the core of what I'm talking about with like, it's not a question of whether crypto is being used to fund terror groups like Hamas. It's a question of like,
00:22:21
Speaker
How big is their role? And as a result of that, what's the appropriate response? So Chainalysis dug into this and they looked at the Chainalysis reactor for counterparties to a wallet that was known to be affiliated with Terra financing. So Chainalysis is like tracking all of these different exchanges and wallets and things like that. And they said, let's jump in and look, we know that this wallet is involved in Terra financing. Let's look at the exchanges that it was,
00:22:47
Speaker
or basically everybody that it was interacting with, which could potentially be exchanges. And they found at least 20 suspected service providers. They pulled one out, and it was an address that processed over 1,300 deposits and 1,200 withdrawals in seven and a half months.
00:23:04
Speaker
And then in the report, they said, quote, of the roughly $82 million in cryptocurrency received by this address, about $450,000 worth of funds were transferred from the known terror affiliated wallet. The person or group of people controlling it is likely not the same person that controls the terror affiliated wallet, but is rather a service provider that knowingly or unknowingly facilitated
00:23:27
Speaker
the terror financing activity so what they're saying here is like this intermediary is probably some type of it of an exchange that doesn't realize they're even participating in this and they had 82 million dollars going through that exchange 450k of it what it looks like was involved in some form of you know terror related funding
00:23:48
Speaker
But to the untrained eye- Which in the grand scheme of things, which in the grand scheme of things, while we don't want any money going to tariff financing, is a drop in the ocean, right? It's a drop in the ocean, right? But here's the important thing. To the untrained eye, if you look at this, it might appear that that full $82 million worth of crypto was raised for tariff financing in that example. But it's much more likely that just a small portion like that $450K of those funds were intended for terrorist activity. And the majority of the funds
00:24:16
Speaker
were processed through the suspected service provider were actually unrelated. And then they went on to say, quote, we have seen recent estimates related to the attacks on Israel that appear to include all flows to certain service providers that receive some funds associated with terror financing. In other words, those totals include all funds, even funds not explicitly related to terrorism financing.
00:24:41
Speaker
It's just not an accurate way to look at it, right? You're just taking like, you're looking at trading volume. It's like saying, okay, yeah, I kind of bought and sold a thousand bucks worth of ETH.
00:24:58
Speaker
Um, a hundred times. So, you know, I've, I've, I've, I've actually pro I've sent over a hundred thousand dollars worth of ETH. It's like, no, I've just been pushing a hundred thousand dollars worth of volume, but there's, there's only a thousand bucks, a thousand dollars worth going on here. It's just like, I appreciate that. Like a lot of this analysis that's done.
00:25:22
Speaker
is done in a very high level way. And it's hard for companies that aren't like chain analysis, right, that have the sophistication to do forensic analysis on the blockchain. The problem is that, you know, it's so easy to just draw up a quick headline like this and make
00:25:41
Speaker
crypto the enemy and it diverts the attention away less so like making crypto like the enemy here and more it changes the narrative away from something that's actually much more important than this and that's the frustrating part.
00:25:56
Speaker
Yeah, I mean, I think you're actually being way too generous here, Matt. I think that there is an absolute attempt to get the big headline, to get the shock and all, to get the clicks, and to push an agenda. And I think that to go from like $450K of terror-funded money, which nobody's really going to
00:26:20
Speaker
care about, to $82 million. Let's just lump it all together. That's where you're going to get your big headline. And that's where these huge headlines that we're seeing in mainstream media around crypto's role in funding Hamas, or at least the claims of crypto's role in funding Hamas, it seems to be that that's where these are coming from. And when you dig in
00:26:40
Speaker
deeper below the surface, what you find is that the estimates that we're seeing, they assume that all flows through service providers that have processed any illicit transactions are 100% illicit when in reality it's just a fraction of them. This is the sort of, I guess, realization that I have had multiple times throughout my career whenever I have worked
00:27:03
Speaker
very closely and intimately with something and then it gets reported in mainstream media and I realize how far off the mark they are and how little they actually dug into the the material at hand to understand it before they started reporting on it and then you start to think like oh wait a second all of these other things that I'm not an expert on that I'm reading in the mainstream media the same thing is happening there so
00:27:27
Speaker
I think that this is an interesting example that you can go to your friends, your family, whoever it is that's asking about this and say, hey, we don't know for sure, but there is most likely more to this story than these big headlines that we're seeing. And there is some data that's coming out to indicate that.
00:27:45
Speaker
Yeah, and I think it's very convenient for a government administration to put a big chunk of the blame on a stateless technology around the funding of terrorist organizations versus actively pointing the finger at maybe other regimes or other groups that maybe will cause some political friction.
00:28:11
Speaker
So I think questioning the incentive here, I think Elizabeth Warren clearly has positioned herself, rightly or wrongly, in the camp firmly against crypto and will dine out on anything related to anti-crypto sentiment. I'm sure the SPF case will be another big example of that.
00:28:37
Speaker
I think the most important thing in all of this is, you know, we can't dismiss the criticisms that can come of this technology. And we've had, you know, a lot of like what we're talking about here around the ways in which this technology is a lot more transparent, can potentially be stopped a lot easier. We've been on the other side of this argument as well, right? Of like the tornado cache situation and how sanctions can be used in certain ways that
00:29:06
Speaker
Maybe we disagree with, maybe we agree with, right? And there's two sides to all this, but I think what happens a lot of the time is with crypto, and in many cases, broader financial services, they're complicated. They're really difficult to understand. It's actually very hard for even those in financial services to do their due diligence on crypto-related analysis. It's quite specific, specialized, and kind of like there's a small group of people that can actually really do this at scale.
00:29:36
Speaker
So I think that's where this all kind of comes out, and we get a lot of narratives. But what I will say is expect more of this narrative to really start heating up. And I do hope that we get more empirical data to support some of the narrative around this. Yeah, I completely agree. And I think it's a great point for us in this community. We have to hear this criticism. We have to take it seriously.
00:30:05
Speaker
Even if this is 80% over-inflation of the issue, the 20% kernel of truth matters, and we should care about that. It is a reality that crypto is being used to fund tera-groups, and that's something that within
00:30:22
Speaker
our space we have to wrestle with and work through. But it's also our responsibility to push back and to educate the public when false claims or inaccurate assessments are being made and to try to help them understand this to your point, Matt, very complicated set of technology, which whenever something is complicated, it's easy to manipulate the public's understanding of it toward your political agenda or for your political
00:30:48
Speaker
will. And as part of that, we have to point out and call out when that is happening and when somebody is being disingenuous or dishonest, which I think to a certain extent is happening here. And I hope that the truth will prevail there and the data will help to show that. But regardless, I think you're totally right. We have to both take this seriously and also
00:31:10
Speaker
You know make the make the effort and take the stand to push back and in an ethical way where it makes sense so there there's certainly a role to be played here and We're yeah, we're gonna be getting much much more of this. So as this this, you know
00:31:29
Speaker
this conflict continues to unfold. I think that there's going to be a role for the community to play and helping people to understand, you know, what what role crypto has or has not played in all of this. Couldn't agree more, Austin. All right, let's wrap things up. And of course, see you next week.
00:32:09
Speaker
The contents of the Decrypting Crypto podcast should not be used and are not intended as investment advice. Please do your own due diligence before making any investment, cryptocurrency or otherwise.