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Terrorist use of cryptocurrencies is not a major risk.

Defense think tank: Terrorist use of digital currencies is a limited risk and overreaction could stifle important innovations.

That’s the message from David Carlisle, formerly of the U.S. Department of the Treasury’s Office of Terrorism and Financial Intelligence, in a report for the Royal United Services Institute, an international defense and security think-tank in London.

He writes that “information on terrorists’ use of cryptocurrencies is limited and anecdotal,” and that it is uncertain whether cryptocurrencies will become a major funding tool given that “terrorists already have a number of reliable financing streams, which show little sign of drying up.”

The report goes through the few reported anecdotes and argues for a measured reaction. “Treating cryptocurrencies as an exceptional threat,” he writes, ”creates the misleading impression that more conventional financial products are not already equally, or more, vulnerable to terrorist exploitation.”

With all this in mind, his policy prescription is spot on:

[B]anning Bitcoin or other cryptocurrencies could stifle important innovations that could enhance financial services. While it is still far from clear how significant an impact cryptocurrencies will have, a number governments, including the UK’s, are keen to enable innovation in the sector.

Cryptocurrencies have particularly vocal champions among some proponents of financial inclusion, or expanding financial services to the world’s poor. Cryptocurrencies’ peer-to-peer nature enables transfers to occur at reduced cost compared to credit card transactions and other established payment methods that rely on numerous intermediaries.

Proponents argue cryptocurrencies could play a role in helping the unbanked to access cost-effective financial services.

Virtual currencies therefore offer governments a test case in harnessing the promise of technological innovation while also managing financial crime risks that are still only taking shape.

Countries should pursue a sensible approach. They should ensure their law enforcement agencies have the necessary resources and skills to uncover related illicit activity; and they can work to improve information sharing with their foreign counterparts on joint investigations. [… ] As with any new technology, awareness of risks is critical. But overreaction and panic in this early stage in cryptocurrencies’ history would be misguided.

This is the approach that Coin Center has been promoting for over two years, and it’s at the heart of the Blockchain Alliance’s mission to ensure that law enforcement has the knowledge about cryptocurrencies that will allow them to react appropriately to the limited risks posed.