The Bank of Israel proposes to regulate the provision of services to licensed cryptocurrency service providers so that banks cannot categorically refuse to provide services and will need to formulate a risk management policy.
The envisaged regulations will be applied through an amendment to the Directive on the proper conduct of banking activities “Management of the risks of money laundering and terrorist financing” in a context of an increase in the volume of customer activity. with cryptocurrencies.
The amendment adds provisions regarding payment services during customers’ cryptocurrency activities, while building on existing definitions in laws relating to provisions, inter alia, the Financial Services Supervision Act (Services financial regulations) and the Money Laundering Prohibition Order.
Here are some guidelines that banks should follow:
Risk assessments and establishment of policies and procedures
In the amendment, the Supervisor of Banks adopted the standard prescribed by the FATF (the Financial Action Task Force), which states that banking companies are required to establish risk management policies and procedures that reflect an informed approach. on the risks based on the following parameters: the type of cryptocurrency and the degree of anonymity it offers to its users, the type and volume of activity with the cryptocurrency and the identity of the provider of cryptocurrency service.
The policy and procedures should take into account the following principles:
1. Banks will not be permitted to refuse to provide payment services during cryptocurrency transactions simply because the source or destination of the transaction is related to the cryptocurrency. The cryptocurrency service provider, which is a party to the business, must be licensed to provide financial asset services in Israel.
2. Banking companies will be required to determine their mode of business with cryptocurrency service providers operating in Israel under license to continue to provide financial asset service, including with cryptocurrency. , and their mode of activity with cryptocurrency service providers who are incorporated or operate outside of Israel.
3. Banking companies will be required to determine the cryptocurrency routes that will be considered legitimate for receiving payment services using cryptocurrencies. For example: the amendment considers cryptocurrencies obtained through mining activity and when no additional transactions have been executed with that same digital wallet as a risk mitigation channel. On the other hand, currency channels that include converting or exchanging between one or more types of cryptocurrency will be considered risky channels, and it is safe to assume that banks will take a hard line on them. .
4. Customers whose cryptocurrency payment service business exceeds ILS 50,000 per year will be required to provide an explanation to the bank company as to the source of the funds the customer used to purchase the currency or pay. for mining activity, as well as cryptocurrency routing information. In special cases, banking companies are allowed to require certificates attesting to the routing of the cryptocurrency.
Prohibition of the provision of the service in special cases
A provision has been added to the ordinance that prescribes a ban on providing payment services through cryptocurrency activities when the cryptocurrency service provider violates its license terms or registration requirements in the country where it was incorporated.
In accordance with the Money Laundering Prohibition Ordinance, banking companies can request certificates attesting to the payment of tax on income and profits from cryptocurrency activities.
Statement under the Prohibition of Money Laundering and Terrorist Financing Act
The amendment mandates that banking companies are required to report semi-annually to their senior executives and boards of directors on their business volumes and exposure to cryptocurrencies.
This planned legislative amendment brings good news for licensed Israeli cryptocurrency service providers (exchanges) and possibly international ones as well. The amendment does not offer anything new to individuals or cryptocurrency companies. They will have to continue to look for creative solutions, which in large part involves setting up activities abroad in a more favorable regulatory and financial environment.