The Israeli banking sector has been very cautious in its approach towards virtual currencies. In light of the Bank of Israel's reluctance to issue meaningful guidelines, banks have consistently viewed activities relating to cryptocurrencies as "high risk." In the absence of institutional leadership, other state institutions have been forced to attempt to create a form of framework for the financial institutions. In an interim decision in 2017, the Tel-Aviv District Court highlighted this issue and accordingly allowed banks to refuse service to accounts connected with the virtual currencies. Since then we have seen a trend of cases backing down from this hardline stance. And now more recently the Attorney General has filed with the Tel-Aviv District Court, the most detailed guidelines yet produced, in its response to a case being heard there.
This client update is intended to describe the current trends and highlight the recent Attorney General's decision which may become the basis for banks determining whether to service accounts with connections to virtual currencies.
In a 2017 ruling of the Tel-Aviv District Court Bits of Gold Ltd. v. Bank Leumi LeIsrael Ltd ("Bits of Gold Case"). Bits of Gold Ltd., an Israeli crypto currency exchange platform, filed a motion in June 2015 against Bank Leumi LeIsrael Ltd., following the bank's decision to block all activities in Bits of Gold's bank account linked to the trade of Bitcoin and other virtual currencies, after almost two years of operations. The bank based its decision on a joint press release by the Bank of Israel, the Capital Market, Insurance and Savings Department, the ITA, the ISA, and the Israel Money Laundering and Terror Financing Prohibition Authority regarding the potential risks inherent in virtual currencies. The bank argued that the regulators had not given any guidance on how to mitigate such risks and ensure the banks' compliance with applicable laws, and therefore it was prudent to take a conservative approach by limiting all activities in Bits of Gold's account related to the trade of virtual currencies.
The court ruled that the main question was whether banks are right in refusing to offer banking services to customers involved in the trade of virtual currencies. Before making its decision, the court invited the Supervisor of the Banks to provide its position on the matter. The Supervisor of the Banks informed the court that it considered the transactions related to the trade of virtual currencies as high risk activities both for the banks and the banks' clients alike. However, the fact that these are high risk transactions does not mean they should be prohibited altogether, rather that each bank should be allowed discretion in determining its policy and to ensure that the necessary risk management protections are in place. The court determined that under these circumstances, where the regulator has warned about the risks involved in connection with virtual currencies, but failed to provide clear guidelines and rules for the Bank to follow, the Bank's decision was within the range of reasonable responses, and therefore, the motion was dismissed.
Since the Bits of Gold Case, there has been a trend of rulings by Israeli courts in which the courts have rejected in one way or another the general refusal of banks to service accounts merely due to the existence of a connection with virtual currencies. For example, rulings have required banks to provide at least minimal evidence before refusing service to accounts (Israminers Ltd. v. United Bank Ltd.) or requiring the banks to allow the account holders sufficient opportunity to provide evidence that the accounts should not be considered "high risk" (Toyga On Line Ltd. et. al. v. Bank Mizrahi Tfahot).
Attorney General's Brief
This month the Attorney General filed an amicus brief with the Tel Aviv District Court in connection with Roey Arev and Yifat Arev v. Bank Mercantile Discount an ongoing case in which the defendant had refused to allow the transfer of funds relating to the sale of virtual currencies to the plaintiffs account. In his brief, which was prepared in full conjunction with various governmental ministries and represents the official position of the Government of Israel, the Attorney General clarified his position with regards to what is to be considered a reasonable response which a bank may take in relation to privately held accounts which are related to the trade of virtual currencies. Without derogating from the banks' roles and responsibilities under anti-money laundering and ant-terrorism regulations, the Attorney General stated that the mere fact that an account is related to the trade of virtual currencies in not, in and of itself reason for a bank to refuse to open or service an account.
In doing so, the Attorney General set forth certain criteria which banks can use in determining if an account is to be considered "high risk" or not, including:
a. limited risk transactions - similar to the common practice in `regular' fiat accounts, the smaller the amount of the transactions the less the bank views those transaction as high risk. Accordingly, should the transactions in the account in question be limited in amount and scope, the account should not automatically be designated as high risk.
b. virtual assets derived directly from mining activities - if the virtual assets were derived directly from mining activities (and the account holder can provide suitable documentation attesting thereto) then the risk level can be lessened as the bank has a clear idea whence the virtual asset came from.
c. virtual assets transferred to/from a single virtual wallet - in the event that the account holder uses a single virtual wallet for the transfer of virtual assets, it can be considered by the bank as indicative of the account as having limited risk. It should be clarified that this criterion is subject to the aforementioned transactions taken by the virtual wallet have taken place in jurisdictions considered low risk for money laundering and on reputable exchanges.
d. approval of the tax authorities that capital gains tax was paid - while the payment of taxes in and of itself is not indicative of risk levels, the payment of taxes can be combined with one of the above factors in the bank's determination whether or not to classify the actions of an account as high risk.
It is important to clarify that the position of the Attorney General deals solely with privately owned accounts and furthermore is not intended to require banks to allow accounts which trade in virtual asserts, rather to create a form of guidelines by which the banks can determine the risk levels of such accounts. Furthermore, as the main reasoning behind the ruling in the Bits of Gold Case was the absence of such guideline, it is quite possible that with the publishing of this position, the Bits of Gold Case will no longer hold the same relevance and banks will no longer automatically reject clients and accounts simply because of their connection to the trading of virtual currencies. Nonetheless, even if adopted by the court in the Arev case, we anticipate that the majority of cases will not fit squarely under the above criteria and we expect that account holders dealing with virtual currencies will continue to encounter issues with Israeli banks. Conversely, it should be noted that in a position attached the opinion of the Attorney General, the Supervisor of the Banks noted that it is of the opinion that at this time the regulatory framework is not yet properly in place and as such banks should not be required to service accounts dealing with virtual currencies. The Supervisor further requested that the banks prepare framework guidelines for classifying accounts dealing with virtual currencies within 90 days, such that we expect further clarifications on this matter. While the brief filed by the Attorney General suggests that the era of automatically blacklisting accounts dealing with virtual currencies is ending, banks are by nature conservative and will remain risk averse. Accordingly, we would encourage relevant account holders to work with professional advisors in order to plan their activities to ensure compliance with all relevant laws and regulations and to build operations in a manner that banks will consider to be "low risk".