Regulating Israeli Banks’ Provision of Services to Licensed Cryptocurrency Service-Providers | Barnea Jaffa Lande & Co.

The Bank of Israel is proposing to regulate the provision of services to licensed cryptocurrency service-providers so that banks will not be able to sweepingly refuse to provide service and will have to formulate a risk management policy.

The planned regulation will be applied through an amendment to the Proper Conduct of Banking Business Directive “Management of Money Laundering and Terror Financing Risks” against the backdrop of the increase in customers’ volume of activity with cryptocurrencies.

The amendment adds provisions regarding payment services during customers’ cryptocurrency activities, while relying on the existing definitions in the laws relevant to the provisions, inter alia, the Supervision of Financial Services Law (Regulated Financial Services) and the Prohibition of Money Laundering Order.

Following are several guidelines that banks will have to follow:

Risk Assessments and the Setting of Policies and Procedures

In the amendment, the Supervisor of Banks adopted the standard prescribed by the FATF (the Financial Action Task Force), which states that banking corporations shall be required to set risk management policies and procedures reflecting a risk-based approach based on the following parameters: the type of cryptocurrency and the degree of anonymity that it provides to its users, the type and volume of activity with the cryptocurrency and the identity of the cryptocurrency service-provider.

The policy and procedures should take into account the following principles:

1. Banks will not be allowed to refuse to provide payment services during cryptocurrency transactions merely due to the fact that the source or destination of the transaction relates to cryptocurrency.  The cryptocurrency service-provider, which is a party to the activity, must hold a license to provide financial asset services in Israel.

2. Banking corporations will be required to determine their mode of activity with cryptocurrency service-providers operating in Israel by virtue of a permit to continue engaging in the provision of a financial asset service, including with a cryptocurrency, and their mode of activity with cryptocurrency service-providers that incorporated or operate outside of Israel.

3. Banking corporations will be required to determine the cryptocurrency routes that will be deemed legitimate for receiving payment services by way of cryptocurrencies. For example: the amendment considers cryptocurrencies obtained through mining activity and when no additional transactions were executed with that same digital wallet as a risk-mitigating channel. On the other hand, currency channels that include conversion or exchange between one or more types of cryptocurrencies will be considered risky channels, and it is reasonable to assume that banks will take a hard line in relation to them.

4. Customers whose payment service activities by way of cryptocurrencies exceed ILS 50,000 per annum will be required to provide an explanation to the banking corporation about the source of the funds that the customer used to purchase the currency or pay for the mining activity, as well as information about the routing of the cryptocurrency. In particular instances, banking corporations are allowed to demand certificates attesting to the routing of the cryptocurrency.

Prohibition of the Provision of Service in Particular Instances 

A provision was added to the Order that prescribes a prohibition on the provision of payment services by way of cryptocurrency activities when the cryptocurrency service-provider is violating its license conditions or the registration requirements in the country where it was incorporated.

Tax issues 

Pursuant to the Prohibition of Money Laundering Order, banking corporations can request certificates attesting to tax payments on income and profits from cryptocurrency activities.

Reporting pursuant to the Prohibition of Money Laundering and the Financing of Terrorism Law

The amendment prescribes that banking corporations shall be required to report biannually to their senior managements and boards of directors about their volumes of activity with and their exposure to cryptocurrencies.

This planned legislative amendment brings some good news to licensed Israeli cryptocurrency service-providers (exchanges) and also perhaps to international ones. The amendment offers nothing new to private individuals or to cryptocurrency companies. They will have to continue looking for creative solutions, which largely involves establishing activities abroad in a more convenient regulatory and financial environment.

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