New instructions for banks
Key features of new directive
If asked what their biggest obstacle is, it is likely that the constantly growing Israeli cryptocurrency community would give the same response: the banks. The banks have repeatedly refused to allow their clients to receive payments derived from their cryptocurrency activities, stating that the funds are derived from an unknown origin and the transactions are deemed as risky overall in terms of anti-money laundering and terrorism financing laws.
However, this approach will hopefully soon be changing. On 30 December 2021, the Israeli supervisor of banks published draft updates to the Proper Banking Conduct Directive (No. 411), recognising the need to provide more clarity to Israeli banks and their clients as the industry matures and cryptocurrencies (termed "virtual coins" under Israeli law) continue to adapt.
In the draft directive, the supervisor sets the tone by clarifying that banks cannot refuse to facilitate cryptocurrency-related transactions merely because of where the funds originated from or are destined to. This guidance follows a number of court decisions which ruled that the general policy applied by some Israeli banks to refuse to serve their clients solely because the funds originated from or were destined to cryptocurrency-related activities was unreasonable and therefore not permitted.
The supervisor instructs banks to conduct their own risk assessment and evaluation with respect to anti-money laundering (AML) and counter-terrorism financing (CTF). Following this assessment, each bank shall adopt dedicated policies and procedures to enable the facilitation of payments derived from cryptocurrencies activities. The following parameters should be included as part of the assessment:
- the type of cryptocurrency;
- the level of anonymity the cryptocurrency allows its users to have;
- the nature and extent of the use of the cryptocurrency; and
- the identity of the cryptocurrency service provider.
The following are some key features of the directive relating to new guidance that is scheduled to take effect three months after the publication of the final version:
- Banks should not refuse to facilitate payments connected to cryptocurrency for the sole reason that the funds originated from or are destined to an activity relating to cryptocurrency, or, if a party to the activity is a cryptocurrency service provider that holds a licence from the supervisor of the Capital Market, Insurance and Savings Authority, to provide a service in financial assets regarding cryptocurrencies (including a transitional permit).
- Banks shall establish methods of operation with regard to licensed cryptocurrency service providers either in Israel or abroad. The following factors will need to be considered:
- the original country of incorporation and the respective legal prohibition in that country on AML and CTF activities; and
- the policies and procedures of the service provider with regard to AML and CTF risk management.
- Banks shall establish a risk assessment policy for the different cryptocurrency routes. For example, routes with a lower risk level could be:
- cryptocurrencies received directly through mining activities where the specific wallet address has never seen any other movement; or
- cryptocurrencies that have been purchased or sold from/to the same wallet address for the same client, where the wallet has not seen any other movement.
- Banks shall be required to identify the source of the funds used for the purchase of cryptocurrencies where the client's business activity exceeds 50,000 new Israeli shekels a year.
- Banks shall be required to establish policies regarding their client's activities and usage of peer-to-peer platforms, which allow the exchange of cryptocurrencies without the intervention and supervision of the platform, and the respective controls on such transactions if they allow such services.
- Banks are permitted to request a written professional opinion that supports and approves the cryptocurrency routes.
- Banks should not provide services when, to the best of their knowledge, the service provider violates the provisions of the law regarding the licence requirements or the registration in its country of corporation.
- Banks are permitted to request a certificate of approval from the Israel Tax Authority regarding the due payment of taxes on profits or income gained from the use of cryptocurrencies.
- Banks are required to report to their management and their board of directors at least once every six months on the scope of their cryptocurrency activities, their major risk points and their monitoring policy.
The supervisor of banks may now receive comments from banks and other market players. Once approved, the directive will enter into force three months after the publication of the final version.
While the directive is certainly a step forward in allowing the Israeli crypto scene to receive banking services in Israel, it remains to be seen how Israeli banks will interpret their risk management policy obligation. A position that is too conservative and risk averse might signal to the market that nothing is new, pushing more businesses outside Israel. On the other hand, a pragmatic policy adhered to the technological and business developments of the market might provide a significant push forward to the already-vibrant Israeli crypto industry.
For further information on this topic please contact Roy Keidar at Yigal Arnon & Co by telephone (+972 3 608 7777) or by email ([email protected]). The Yigal Arnon & Co website can be accessed at www.arnon.co.il.
Arkadius Stark, student, assisted in the preparation of this article.