SUMMARY

  • An Israeli District Court ruled that a bank account opened by a cryptocurrency exchange could not be properly monitored under AML rules. 
  • Cryptocurrencies are favored in the black market.
  • The KYC system still has loopholes.
  • Owners of cryptocurrencies enjoy the benefits of anonymity.
  • The blockchain platform used in cryptocurrencies can be used to cut out the middleman in financial transactions.

David Grana: What are some of the key elements about recent ruling by the Israeli District Court about the use of cryptocurrencies?

Roy Keidar: The decision took about a year and a half to make. It is not considered a major decision in the big picture, but in this specific field, it demonstrates how regulators look at cryptocurrencies. The case was whether a bank's decision not to allow for a cryptocurrency exchange platform called Bits of Gold to open a bank account was legal. The banks argued that because of money laundering risks, they were afraid that they could not properly monitor the bank account according to AML rules. Banks were concerned about the possible repercussions from Israeli and foreign regulators. As a result, the bank concluded that it was safer for them not to allow business transactions in cryptocurrencies and told the applicants to find another bank to conduct their business. Bits of Gold was one of the first Bitcoin exchange platforms, which insisted that it was not violating any regulation. The court decided to side with the bank because, as long as the regulators, whether it be the Israeli Central Bank or the Anti-Money Laundering Authority, don't provide clear guidelines as to financial institutions doing business with cryptocurrencies, one cannot expect the commercial banks to take the risks on themselves.

David: As a result, have the courts put this issue in the hands of the regulators?

Roy: Yes, the courts threw it back to the regulators to make a decision and in allowing banks the choice to refuse opening an account. I do

feel that an opportunity was missed here to begin exploring the use of blockchain technology, particularly since, in many ways, it could be safer than cash.

David: Since cryptocurrencies use their own blockchain platform, wouldn't this require the cryptocurrency issuer to comply with AML and KYC laws?

Roy: Let's assume that AML applies to anything that uses cryptocurrency. The question is, where do you apply AML rules and procedures in the process of changing from fiat to cryptocurrencies, then to other cryptocurrencies and back to fiat. My argument is that, because the blockchain is a public ledger that records all transactions, it is possible to go back and see exactly what has transpired. This is a system that we could only have dreamt of years ago. But while blockchain has the capability to record all transactions, owners of cryptocurrencies enjoy the benefit of being anonymous. This is because, instead of a bank account, one uses a wallet, which allows buyers and sellers to operate (almost) anonymously. The perception is that cryptocurrencies are favored in the black market. But this is only a perception. The process is anonymous when you convert one cryptocurrency to another. Their are no names used, only codes. However, to get fiat money into the crypto system, one would not go through a KYC process - at least in most of the world today. If you wanted to use that money for some form of illegal activity, it can be traced back to the original wallet. The main problem that I see is that we still have jurisdictions in the world where cryptocurrency wallets can be opened and fiat money can be deposited without going through the KYC process. Once we solve this problem, we can figure out a system that is much safer than the fiat currency system, which has many more loopholes, aside from inherent costs.

David: Is the initial purchase of a cryptocurrency a traceable transaction?

Roy: In many jurisdictions today, when you go through a cryptocurrency exchange platform, you will have to go through a KYC process. This is certainly true for many western countries, such as the U.S. The problem is that, at the same time, you can go to certain countries and purchase cryptocurrencies without going through the KYC process. So, yes, it can be traceable, but the system still has loopholes.

David: Is it safe to say that there is an issue with a lack of global cooperation in the area of KYC and AML?

Roy: Exactly. But, cryptocurrencies are not the only global problem when it comes to AML and KYC. Other problems arise with other types of financial transactions that don't neccessarily involve cryptocurrencies, such as the Financial Action Task Force (FATF), in which countries collaborate to tackle money laundering and terror financing. Once you adopt these standards, enforcement is much easier.

David: Is it possible to contain cryptocurrencies for their use in one jurisdiction while complying with KYC and AML?

Roy: You can regulate the entry points of cryptocurrencies, which are the wallets, and require a full KYC process for anyone who opens one. The problem is that these wallets can exchange money all over the world. In order to regulate these transactions, you would need the cooperations of other regulators around the globe.

David: How can blockchain be implemented into the greater financial ecosystem?

Roy: I have been studying blockchains for the last two and a half years. Cryptocurrencies are but one application of a blockchain, and it's fascinating to see their different applications. I'm one of those who think that blockchain is the biggest news since the internet. What the internet is to information and data, blockchain is to value and recording a specific transaction. Blockchains allow you to cut out the middle man, which is one of the biggest problems in the world today. They can provide a network in which you can do business, transfer value, use smart contracts, record activities, and much more, while saving a lot of money, time, energy, and allowing appropriate governance and adequate processes. I would say that we are going to see blockchain technology in many different settings. We already see public blockchain, such as Bitcoin, but we are also going to see big companies using private blockchains, such as the R3 consortium, which includes more than 40 different companies. Blockchains won't just be in the financial world. We will see them in use for royalties, real estate, IP and governance. As an example blockchain is being used for identifying refugees; because it is a decentralized ledger, you can use it to provide a provisional identity which confirms the identity when the individual goes to another country. However, blockchain still suffers from a lot of technological challenges. I am not even sure that the technology in its current form is the same technology that we will see down the road. We may see major advancements in the way that blockchains are used and applied.

David: Thank you for sharing your views on this topic.