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Bank of Israel issues draft guidelines for digital asset AML, CFT

Israeli digital asset firms will now be able to access banking services easily after the country’s central bank clarifies its stance on the provision of these services to virtual asset service providers (VASPs). The Bank of Israel (BOI) issued new guidelines prohibiting banks from denying services to VASPs as adoption surges.

The BOI, through its Banking Supervision Department, recently published a draft circular breaking down the banks’ responsibilities in regards to managing anti-money-laundering and combatting the financing of terrorism (AML/CFT) risks that emanate from the digital asset industry. 

BOI believes that there’s a high potential risk of money laundering and terrorism financing through digital assets. These can be through the use of digital assets that have anonymity built into their structure, as well as lax Know Your Customer measures by some wallet providers. This enables significant amounts to be transferred between countries without any supervision or regulation, it noted.

The draft regulation will require commercial banks to conduct a risk assessment and set out procedures for transferring money that stems from or is destined for virtual currencies. The central bank outlines that the VASP must have received a license for providing financial asset services from the Supervisor of the Capital Market, Insurance, and Savings Authority. 

Banks will be required to examine each case individually, and the regulator prohibits them from issuing sweeping refusals to VASPs.

Banks must also clarify the source of the funds used by their clients to purchase virtual currencies and the path that the virtual currency follows since being purchased in fiat.

Yair Avidan, the Supervisor of Banks, said the regulations were necessary given the increase in customer activity volumes in virtual currencies in Israel. This activity comes with a high risk of money laundering, and as such, “this draft regulation sets out a number of principles for managing such risks, which will help banking corporation customers who wish to realize money that originates in virtual currency activity, while managing the risks inherent to the banking system as part of such activity.”

The new draft circular comes four months since new AML and CFT rules took effect for VASPs. A joint effort between the Ministry of Justice and the Capital Market, Insurance and Savings Authority, the rules followed guidelines from the Financial Action Task Force (FATF).

 “We hope that this order will significantly reduce transfer blocks and the denial of banking services experienced by crypto users and investors, and create a better atmosphere for investors, users and companies in the field,” Youval Rouach, the CEO of Israeli digital asset exchange Bits of Gold, commented.

The regulations also come at a time when concerns over the use of digital assets to evade sanctions and fund terror groups have escalated. A recent report revealed that Russians have been turning to digital assets to avoid crippling sanctions on local institutions, with billions of dollars being funneled to Dubai and some other Middle Eastern cities through European entities. 

As CoinGeek reported, local exchanges in Dubai have reported receiving requests to process orders above $2 billion every other day as many Russian-linked entities fear that it won’t be long before sanctions in Europe and Asia catch up with them.

Israel has had its own struggles with digital asset terror funding. The Hamas terror group has been raising funds through digital currencies since 2019, when Israeli authorities started cracking down on its other funding channels.

A month ago, the Defense Ministry announced that it had seized 30 digital asset wallets linked to the group. The wallets were owned by a Gaza Strip-based exchange that’s owned by a prominent local family, which has been linked to terror funding for years. The ministry claimed that the exchange had processed tens of millions of dollars linked to Hamas over the years.

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