Remarks by Bank of Israel Deputy Governor Dr. Nadine Baudot-Trajtenberg at the Knesset Finance Committee meeting on activity and use of virtual currencies
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.