On 25 February 2018, the Israeli Supreme Court, in what appears to be a landmark decision, granted temporary relief in favour of a crypto-currency (Bitcoin) trading company, Bits of Gold Limited (BoG) against its bank, Bank Leumi (Leumi).
The decision, whilst preliminary and not on the merits of the legal questions before it, contains insightful observations about the nature of risks inherent in crypto-currency trading and whether it is reasonable for a bank to impose a blanket prohibition on providing banking services on the ground that such risks are excessive and pose a significant risk for the bank not complying with anti-money laundering and terrorist financing obligations, amongst others.
In deciding in favour of BoG, the Court ordered that Leumi must not impose a blanket prohibition on transactions occurring on BoG’s account at Leumi (effectively requiring the account’s closure) but may, on a transaction by transaction basis, refuse instructions/transactions where there are sufficient substantive reasons to do so.
Leumi opened an account for BoG in 2013 knowing that its business model is to trade in Bitcoin. Between 2013-2015 BoG was subject to certain incidents where computer hackers initiated unauthorised money transfers to BoG’s account at Leumi. BoG cooperated with Leumi and in fact identified and dealt with a number of the incidents itself. In 2015, Leumi’s Board took a decision in principle to prohibit financial transactions through its accounts in connection with crypto-currencies. Leumi’s Board decision was heavily influenced by a public statement made by a number of Israeli financial regulatory authorities including the Bank of Israel warning about the hazards involved in dealings with crypto-currencies.
The key legal question for the Court to consider in the appeal was whether Leumi’s refusal to provide services to BoG in connection with crypto-currencies in general and Bitcoin in particular had been reasonable (having regards to the risks to Leumi which are associated with such activities). The risks highlighted by the Bank of Israel in its public statement included money laundering, terrorist finance, fraud and deception.
The Court decided that BoG had reasonable prospects of succeeding on the merits of its case. In deciding in favour of the grant of a temporary relief, the Court considered that the issue must be decided on the basis of the risks posed by the trading of crypto-currencies and specifically in light of the idiosyncratic operational risks associated with BoG’s business including steps taken by it to mitigate such risks. Another seminal topic to be decided by the Court involves the inherent friction between the obligation of banks to provide banking services as against their duties to prevent illicit activity being facilitated through their accounts.
BoG’s transparency and compliance culture has been referred to as an important factor in determining the relief application. Additionally, the Court observed that banks have appropriate tools to mitigate the risks posed by trading in crypto-currencies in particular the prevention of activities which are suspected as illicit.
The decision ought to be seen as a boost to the virtual-currencies world in that it portrays it in a legitimate rather than illegitimate light. It would of course be very interesting to follow the actual outcome of the substantive determination of this case. A further observation which would be important for banks is that the Court seems to have concluded that banks possess sufficient tools to handle the risks posed by virtual-currencies activities leaving the only reasonable ground for refusal of such activities to be poor record of risk management and compliance by businesses seeking to carry out such activities.