The J&K Police’s State Investigation Agency on July 11, 2025 raided three places in connection with a terror funding case involving the use of cryptocurrency. These searches were aimed at collecting critical evidence involving cross-border funding through cryptocurrency for fuelling terrorism in J&K. They recovered vital electronic devices, marking a breakthrough in exposing the clandestine financial networks that keep the pot of terrorism boiling.

Documented origins of terrorists using cryptocurrency date back to 2019 when Hamas engaged in a cryptocurrency donation campaign that led to the US seizing several websites and 150 cryptocurrency accounts linked to its armed wing. In India, this is, perhaps, the first reported incident of cryptocurrency being used to fund terrorist activities distinct from money-laundering. Money-laundering is largely a legitimisation-oriented process for dirty money while terrorist financing does not emphasise legitimisation. However, both aim to erase money trails.

This has to be viewed in the background of Pakistan, a country suspicious of digital currencies till a few months back unveiling hasty efforts in embracing crypto. It created the Pakistan Crypto Council in March 2025, appointing a Canadian-Chinese businessman, Changpeng Zhao, founder of Binance, world’s largest crypto exchange, as its adviser and signing an agreement with World Liberty Financial, a crypto company linked to the US President’s family. While the official reason advanced for the change of heart was attracting investments, strategic angle to curry favour with the US President is apparent.

What India needs to be worried about is the anonymity that digital currencies and blockchain technology provide to Pakistan. Sponsoring terrorism is an expensive affair and its funding comes through both legal and illegal channels. Accordingly, a vital prong of a counter-terrorism strategy is launching a financial war to choke the flow of funds to terrorists. Combating the financing of terrorism has a long gestation period and does not show immediate results. Presently, the resources being devoted towards this are inadequate, with the establishment preferring to focus on visible security measures and offensive actions to eliminate terrorists and their sanctuaries. It stems from the fact that protective measures are reassuring for the public and thus politically expedient.

Terrorist financing consists of two activities – money generation and its distribution to the terrorists. Till now, the main sources of funding for terrorist and insurgent groups in India have been clandestine contributions from the ISI of Pakistan, contributions from religious, fundamentalist and pan-Islamic terrorist organisations in Pakistan, donations from ostensibly charitable organisations from Islamic countries, contributions from transnational criminal groups, such as the mafia group led by Dawood Ibrahim,  narcotics smuggling, fake Indian currency notes (FICN), diverting overseas donations to non-profit organisations and contributions by Indian diaspora.

The distribution of money or value to terrorists has been carried out largely through three channels — the use of the financial system; physical movement of money such as through cash couriers; and the international trade system. Terrorists use both the organised financial sector and alternative remittance systems like hawala to move money.

It has been found that the movement and distribution of terrorist funds in India is mostly conducted through informal channels such as hawala, couriers and smuggling of FICN. Presently, terrorists do not rely much on the formal banking sector to generate or move their funds, however, a close watch needs to be maintained. The Pakistan High Commission has also been known to act as a conduit of funds to terrorist groups in Kashmir.

The Indian policy for CFT is grounded in anti-money-laundering laws and predates virtual assets and virtual asset service providers. Laws scattered over a number of Acts deal with various aspects of terrorist financing. The major ones include The Unlawful Activities (Prevention) Act, 1967 as amended, The Prevention of Money Laundering Act, 2003, Foreign Exchange Management Act. While the MHA is responsible for implementing the Unlawful Activities (Prevention) Act under which terrorist financing is an offence, economic offences are dealt with by the Finance Ministry.

The Central Bureau of Investigation also has responsibilities for economic offences, terrorism and FICN. The contemporary structures and procedures in place, including the Financial Intelligence Unit (FIU), are focused on large-scale financial fraud and cannot detect the money being canalised to terrorists. It is difficult for the agencies dealing with economic offences to distil terrorist financing cases from the reports they receive. The FIU received 1,81,27,460 cash and 3,68,592 suspicious transaction reports in 2023-2024 and disseminated 2,750 cases to intelligence and law enforcement agencies. However, its effect on CFT has been negligible.

Terrorist financing related information at present is not a priority for the central or state intelligence agencies and the police at the grassroots level. As a result, intelligence reporting on the issue lacks overall coordinated direction and is incident driven. Moreover, the responsibility for the problem is diffused, fragmented amongst a plethora of agencies, each working in watertight compartments, resulting in lack of accountability.

Law enforcement and intelligence agencies need to assign additional resources for gathering critical information related to terrorist financing, conduct proactive investigations and follow leads provided by financial oversight agencies. A comprehensive law to combat terrorism, with explicit provisions to counter terrorist financing, will also be indicative of the declared intent of the nation to effectively deal with the menace of terrorism.

While terrorist funding is a global problem, free market economy and new user friendly technologies accentuate the problems in tracking the flow of money. Moreover, free market principles are often not compatible with the regulatory mechanisms that are intended to protect them from terrorist abuse.

We need to identify the risks of emerging technologies like generative artificial intelligence, blockchain on financing of terrorism.  Terrorists are further going to exploit information technology to maximise the effectiveness of their operations. They are already using cellular / satellite phones, internet, email and chat rooms. International financial movements are facilitated by IT. E-commerce and internet financial services add a further dimension of risk and open up additional mechanisms for fraud, money-laundering and tax evasion. E-money and internet banking reduce face-to-face contact and the ability of the financial institutions to verify the identity of the customer. India needs to adapt to the growing nexus between crypto and terror financing to make its security frameworks more agile and responsive.