If you would ask the constantly growing Israeli cryptocurrencies community what’s their biggest obstacle you'll most certainly get the response: the banks. Clients were repeatedly refused by their banks to receive payments derived from their activities involving cryptocurrencies, given the reasoning that the funds derived from an unknown origin, and overall, the transactions were deemed as risky in terms of anti-money laundering and terrorism financing laws.
As of last week this might be changing. The Israeli Supervisor of Banks has updated the Proper Banking Conduct Directive No. 411 (“Directive”), recognizing the need to provide better clarity to the Israeli banks and their clients as the industry matures and cryptocurrencies (termed virtual coins under Israeli law) gain more adaptation.
In its Directive the Supervisor sets the tone by clarifying that banks cannot refuse facilitating cryptocurrency related transactions merely because where the funds originated from or destined to. This guidance follows a number of court decisions declaring that a general policy applied by some of the Israeli banks to refuse serving their clients solely because the funds originated from or destined to cryptocurrency related activities is unreasonable and therefore illegal.
The Supervisor instructs the banks to conduct their own risk assessment and evaluation with respect to AML and CTF.
Following the assessment, each bank shall adopt dedicated policies and procedures to enable the facilitation of payments derived from the activity in cryptocurrencies. The following parameters should be included as part of the assessment: (1) The type of cryptocurrency (2) The level of anonymity it allows for its users (3) The nature and extent of use (4) The identity of the cryptocurrency service provider.
Here are some key highlights from the Directive relating to new guidance scheduled to take effect within 3 months time:
- The banks shouldn’t refuse to facilitate payments connected to cryptocurrency for the sole reason that the funds originated from or destined to a an activity which entwines with cryptocurrency, if the cryptocurrency service provider, whom is a party to the activity has received a permit from the Supervisor of Capital Market, Insurance and Savings Authority, to provide a service in financial assets regarding cryptocurrencies (or holds a transitional permit to do so) .
- The banks shall establish methods of operation with regard to licensed cryptocurrency service providers either in Israel or abroad. The following factors would need to be considered: (a) The original country of incorporation and the respective legal prohibition on AML and CTF activities in that country. (b) The policies and procedures of the service provider with regard to AML and CTF risk management.
- The banks shall establish risk assessment policy related to the different cryptocurrency routes. For example, routes with lower risk could be: (1) Cryptocurrencies received directly through mining activities, and the specific wallet address has never seen any other movements. (2) Cryptocurrencies that have been purchased or sold from/too the same wallet address for the same client and this wallet hasn’t seen any other movement.
- The banks shall be required to identify the source of the funds used for the purchase of cryptocurrencies so long as the client’s business activity exceeds 50,000 NIS a year.
- The banks shall be required to establish policies regarding their client’s activities and usage of P2P platforms, which allow the exchange of cryptocurrencies without the intervention and supervision of the platform, and the respective controls on such transactions in case it allows such services.
- The banks are permitted to request a written professional opinion, which supports and approves the route of the cryptocurrencies.
- The banks should not provide services when to the best of their knowledge, the service provider violates the provisions of the law regarding the permit requirements or the registration in its country of corporation.
- The banks are permitted to request a certificate of approval from the Israel Taxes Authority, regarding the duly payments of taxes on profits or income gained from the usage of cryptocurrencies.
- Banks are required to report on the extent of activities it holds in cryptocurrencies, its major risk points and its monitoring policy, to its management and to the board of directors at least once every six months.
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 the Israeli banks interpret their risk management policy’s obligation. A too conservative, risk-averse position might signal the market that nothing is new under the sun, pushing more businesses outside of Israel. While a pragmatic policy, adhered to the technological and business developments of the market might provide a significant push forward to an already vibrant Israeli crypto industry.