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Regulating Israeli Banks’ Provision of Services to Licensed Cryptocurrency Service-Providers – JD Supra

The Bank of Israel is proposing to regulate the provision of services to licensed cryptocurrency service providers (i.e., exchange platforms). The purpose of the proposal is to ensure banks are not able to sweepingly refuse to provide service and instead must formulate a risk management policy.
The planned regulation will find application through an amendment to the Proper Conduct of Banking Business Directive “Management of Money Laundering and Terror Financing Risks” against the backdrop of an increase in customers’ volume of activity with cryptocurrencies.
The amendment adds provisions regarding payment services during customers’ cryptocurrency activities, while relying on the existing definitions in the laws relevant to the provisions, inter alia, the Supervision of Financial Services (Regulated Financial Services) Law and the Prohibition of Money Laundering Order.
In the amendment, the Supervisor of Banks adopted the standard prescribed by the Financial Action Task Force (FATF). This standard states that banking corporations must set risk management policies and procedures reflecting a risk-based approach based on the following parameters: the type of cryptocurrency and the degree of anonymity it provides to its users, the type and volume of activity with the cryptocurrency, and the identity of the cryptocurrency service provider.
The policy and procedures should take into account the following principles:
1. Banks may not refuse to provide payment services during cryptocurrency transactions merely due to the fact that the source or destination of the transaction relates to cryptocurrency, provided that the cryptocurrency service provider holds a license to provide financial asset services in Israel.
2. Banking corporations must determine their mode of activity with cryptocurrency service providers operating in Israel by virtue of a permit to continue engaging in the provision of a financial asset service, including with a cryptocurrency, and their mode of activity with cryptocurrency service providers that are incorporated or operate outside of Israel.
3. Banking corporations must determine the cryptocurrency channels deemed legitimate for receiving payment services by way of cryptocurrencies. For example, the amendment considers cryptocurrencies obtained with the help of mining and when no additional transactions were executed with that same digital wallet as a risk-mitigating channel. On the other hand, currency channels that include conversion or exchange between one or more types of cryptocurrencies are considered risky channels. Thus, it is reasonable to assume banks will take a hard line in relation to them.
4. Customers whose payment service activities by way of cryptocurrencies exceed ILS 50,000 per annum must provide an explanation to the banking corporation about the source of the funds the customer used to purchase the currency or pay for the mining activity, as well as information about the routing of the cryptocurrency. In particular instances, banking corporations may demand certificates attesting to the routing of the cryptocurrency.
Added to the Prohibition of Money Laundering Order is a provision prohibiting the provision of payment services by way of cryptocurrency activities when the cryptocurrency service provider that is a party to the activity is violating its license conditions or the registration requirements in the country of its incorporation.
Pursuant to the Prohibition of Money Laundering Order, banking corporations can request certificates attesting to tax payments on income and profits from cryptocurrency activities.
Pursuant to the Prohibition of Money Laundering Order, banking corporations can request certificates attesting to tax payments on income and profits from cryptocurrency activities.
This planned legislative amendment brings some good news to licensed Israeli cryptocurrency service providers (exchange platforms) and also perhaps to international ones. The amendment offers nothing new to private individuals or to cryptocurrency companies. They will have to continue looking for creative solutions, which largely involves establishing activities abroad in a more convenient regulatory and financial environment.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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