Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
Bitcoin used to be a great way to transmit money if you didn't want anyone to know what you were doing. You could find some shady operator to accept bags of cash in exchange for Bitcoin, which you could then send around the world, hiding behind a string of numbers and letters, without the watchful eye of pesky intelligence agents or compliance officials.
As has been well-documented by articles and books like Andy Greenberg's Tracers in the Dark, that dream died with the rise of blockchain analytics firms like Chainalysis and Elliptic, as well as the growing realization by law enforcement agencies that Bitcoin represented a golden age of surveillance. A core characteristic of Bitcoin—that everything happens publicly, on the blockchain—means that careful detectives could lump together transactions, force intermediaries to reveal their users' IP addresses or locations, and unmask illicit actors like never before.
In April, Hamas made global headlines when it announced that its military arm would stop accepting donations in Bitcoin, with a Palestinian news outlet citing messages posted to a Telegram group. Hamas had been using platforms like Binance to launder money and fund its operations, but the wallets kept getting frozen by law enforcement sting operations.
And yet, after the start of the recent war in Gaza, the Wall Street Journal reported that Hamas had raised millions in crypto in the year leading up to the Oct. 7 attack in Israel—an article that proved controversial after its data source, the blockchain analytics firm Elliptic, tried to retract its own findings.
The more interesting question, though, was how Hamas continued to raise crypto if its wallets kept getting frozen. A new report from the WSJ over the weekend provided an answer. Hamas was no longer turning to Bitcoin, but instead an increasingly popular method for illicit financing: the stablecoin Tether issued on the blockchain Tron.
Readers of this newsletter should not be shocked by the development—I wrote about the trend back in June, when another blockchain analytics firm, TRM Labs, found that 92% of terrorist financing happened through Tether on Tron. Both the stablecoin and the blockchain are notoriously unregulated and less susceptible to seize-and-freeze requests from law enforcement officials, making them an attractive option for actors frozen out of the traditional financial system like Hamas.
According to the WSJ, money service businesses in Gaza, which often resemble traditional storefront operations offering international money transfers, would send digital tokens like Tether to operators abroad to settle debts, an alternative remittance system known as hawala with the added innovation of crypto. This allowed Hamas and its affiliates to receive large sums from Iran and reduced the need to move physical money. Israeli officials said as much as half of the money going through the exchanges was going to Hamas.
The addition of the money service businesses, as well as the privacy-additive nature of Tether and Tron, makes it more difficult to trace where the money is coming from and going, as well as how much is actually linked to illicit groups—functioning almost as a low-tech mixer like Tornado Cash. While a larger platform like Binance is willing to comply with seize-and-freeze requests and sanctions controls, it is more difficult to police smaller shops.
The question of scale is perhaps the most important one: How much crypto is moving through this method? As always, the answer is slippery.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
