Israeli Regulators Issue Joint Warning on Cryptocurrencies

Nermin Hajdarbegovic
Feb 19, 2014 at 13:54 UTC
Updated Feb 19, 2014 at 15:56 UTC

The Bank of Israel (BoI) and the Israeli Ministry of Finance have issued a joint statement calling on the public to exercise caution with regard to digital currencies.

The warning falls in line with what we’ve heard from regulators across the world over the past few months.

The Bank of Israel and the ministry stress that digital currencies are not legal tender, nor are they issued or backed by a central bank, which means there is not legal requirement for anyone to accept or exchange them.

The joint statement was issued following a meeting convened by the Governor of the Bank of Israel, with the participation of representatives from the Capital Market, Insurance and Savings Department, the Israel Tax Authority, the Israel Securities Authority, and the Israel Money Laundering and Terror Financing Prohibition Authority.

The participants agreed to continue to examine various perspectives related to digital currencies.

Anonymous transfers, risk of fraud

Israeli regulators highlighted that digital currency transfers can be anonymous, which means they can be used to dodge taxes, launder money and finance terrorism.

Thus, financial institutions will need to take this fact into account in their risk management policies and keep the Israeli Money Laundering and Terror Financing Prohibition Authority in the loop.

Another problem is fraud: Israeli regulators warn that digital currencies are “fertile ground” for fraudulent activities, including Ponzi schemes. They can be used to devise innovative products and attract potential investors who don’t understand what they’re getting themselves into.

Transactions cannot be cancelled, so digital currencies offer limited recourse in case something goes wrong – a fact easily exploited by fraudsters.

Volatility and security

computer security

Unsurprisingly, volatility is also mentioned in the warning. Security is another problem addressed in the warning. Since transactions are processed using decentralised peer-to-peer networks, many of them remain anonymous and difficult to trace.

This makes digital currencies suitable for illegal activities and it also warrants attention from law enforcement authorities. Law enforcement could even close trading platforms and prevent the use of customer’s capital held by affected platforms, the regulators warn.

In addition, exchanges usually don’t operate under a license and they lack oversight. In several instances exchanges were successfully targeted by attackers and many proved unstable and prone to questionable business practices.

Theft is yet another possible problem. Since most digital currencies are stored on computers, they are susceptible to cyber attacks. In addition, the loss of a device holding the bitcoins or a wallet password can also lead to the loss of digital currencies.

Of course, experienced users know how to steer clear of such risks.

What next for Israeli users?

The warning is more or less standard, it echoes what we’ve been seeing from regulators across the world for months. Israel does not appear willing to introduce any new restrictions or prohibitions on digital currency, concluding:

“In light of the issues noted above, the Bank of Israel, the Capital Market, Insurance and Savings Department, the Israel Tax Authority, the Israel Securities Authority, and the Israel Money Laundering and Terror Financing Prohibition Authority recommend to members of the public considering the use of decentralized virtual currencies to understand their characteristics, to be aware of the unique risks inherent in their use, and to display heightened awareness and caution. With this, the authorities in Israel join regulators in the US, Canada, the EU, and elsewhere, who have published similar warnings to the public.”

Earlier this year it emerged that Israeli regulators were taking a “wait and see” approach – they were waiting to see what the rest of the world would do about cryptocurrencies.

For all intents and purposes, the use of digital currencies in Israel remains legal and unregulated, despite this latest warning.

Israel Flag Image via Shutterstock

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