Israel’s financial regulatory authorities are regulating virtual currencies (cryptographic currencies) due to their steady increase in use. For example, the Capital Market, Insurance and Savings Authority (CMISA) issued an anti-money laundering order specifically addressing cryptocurrencies, which came into effect in November 2021. The Supervisor of Banks is continuing this trend and has recently taken an initial measure to regulate the use of virtual currencies (a new section in Proper Conduct of Banking Business Directive 411).

Managing Money Laundering and Terror Financing Risks

The risk of money laundering is naturally one of the main risks involved in using and trading cryptocurrencies. Since this is a relatively new field, banks have had a hard time managing the associated money laundering risks. Banks have experienced difficulties providing their customers with banking services when the source of the funds was cryptographic currencies. For this reason, the Supervisor of Banks was tasked with providing guidance, which received initial expression in the amendment to Proper Conduct of Banking Business Directive 411. This amendment addresses how banks should manage money laundering and terror financing risks.

The new section, 87A, prescribes defining banking payment services involving virtual currency activities as high-risk activities. Such activities require more stringent control measures. Furthermore, and in order to prevent banking corporations from outright refusing to allow activities involving cryptocurrencies without any grounds for doing so, the section directs banks to formulate a policy and procedures enabling them to provide banking services involving cryptocurrencies. In doing so, banks must take into account several factors:

• The different types of virtual currencies.
• The degree of anonymity they provide to users.
• The volume of activity.
• The identity of the virtual currency service provider.
• The characteristics of the customer’s activities.

Section 87A enables banks to rely, to a certain extent, on virtual currency service providers operating by virtue of licenses from CMISA, and directs banks to manage risks in an informed and transparent manner for service providers supervised by foreign countries.

Violations of Licensing Laws

Furthermore, section 87A adopts the global policy set by the intergovernmental Financial Action Task Force. This prohibits banking corporations from providing payment services to local or foreign service providers that violate licensing and registration laws in their countries of incorporation.

As stated, the purposes of section 87A are to enable banks to expand their banking services to those engaging in the field of virtual currencies and to remove bureaucratic and other obstacles that arose, inter alia, due to inadequate regulatory guidance.

The amendment to Proper Conduct of Banking Business Directive 411 will come into effect on November 9, 2022.

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