Bank
of Israel Deputy Governor Dr. Nadine Baudot-Trajtenberg spoke this morning at
the Knesset Finance Committee on a number of issues related to the phenomenon
of virtual currencies. The main points
of her remarks are below:
The
virtual currencies that exist today are based on private initiatives, and no
official bodies such as central banks or governments stand behind them. Due to the large amount of interest in
purchasing virtual currencies, mainly by young people, it is very important
that anyone considering this should be aware that there is no government
responsibility for these activities, and that such a person should take into
account that the high level of volatility and the lack of supervision may lead
to a sudden loss of value.
Bitcoin
and similar virtual currencies are not a currency, and are not considered
foreign currency. The Bank of Israel’s
position is that they should be viewed as a financial asset, with all that this
entails. Within the definitions of the
functions ascribed to the Bank of Israel within the Bank of Israel Law—to issue
the official currency that is legal tender in Israel and to regulate the cash
system in the economy—the law defines the currency as the “New Shekel”. Within the Bank of Israel’s functions in
managing the foreign exchange reserves and monitoring developments in the
foreign exchange market, the law also defines “foreign currency” as “banknotes
or coins that are legal tender in foreign countries and are not legal tender in
Israel.”
As such, Bitcoin and similar currencies do not fit the legal definition of
currency or foreign currency. Beyond the
legal definition, even if we look at the economic parameters of virtual
currencies, they do not fill the main functions of currency. A critical element that exists in currency is
the measure of confidence that users have in it. This confidence is derived from the fact that
the currency is legal tender with legal backing, and that it fulfills the
functions ascribed to it in the economic literature—a unit of account, an mean of payment, and stability that enables it seve as a store
of value. None of these exist with
Bitcoin or similar currencies, which are characterized by higher volatility,
difficulty in making transactions, and a lack of certainty regarding the
parties that stand behind it.
There
have recently been a number of complaints by the public regarding apparent
difficulties that banks are raising for customers who wish to transfer money
from their bank accounts in order to purchase virtual currencies. Beyond the risks to the customer, there are
also compliance risks for the banks. It
is important to illustrate this: The anonymous
nature of virtual currencies leads to the possibility that they may be used to
launder money, finance crime, and so forth.
A customer wishing to transfer his money to an exchange where virtual
currencies are sold may later transfer the money anonymously to any unreliable
party in Israel or abroad. If the money
is used for an inappropriate purpose, the bank that made the transfer may bear
responsibility toward law enforcement authorities in Israel or abroad. Therefore, every bank must define whether it
will provide services to customers in this area, and if so, how the risks will
be managed.
The
Banking Supervision Department directives require the banks to use cautionary
measures to prevent money laundering and the financing of terrorist activities,
and to meet the rules of the Financial Action Task Force (FATF). Thus, there are indications that require the
banks to relate to customers’ accounts as high-risk accounts, one of which is a
high amount of activity in cash. In this
context, the transfer of virtual currency is considered as the transfer of cash,
and such an account can therefore be considered a high-risk account. The Banking Supervision department has
established an internal team to examine and study the matter, and the team is
beginning its work.
It
should be noted that not much can be learned from international practices, since
as far as we know, no banking regulator anywhere in the world has issued
guidelines to the banking system on how to act in relation to customers’
activity in virtual currencies. Our
assessment is that this indicates that there is a real difficulty in issuing
sweeping guidelines to the system regarding the proper way to estimate, manage,
and monitor the risks inherent in such activity. As such, at this stage, the Banking
Supervision Department cannot provide a response for customers whom the banks
refuse to allow converting the money in their accounts into virtual
currencies. If a solution is found, it
will need to be implemented in conjunction with the Israel Money Laundering and
Terror Financing Prohibition Authority, and be acceptable to it.