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Israeli Court Issues Principled Ruling on Banks’ Conduct with Monies Originating from Digital Currencies

The Tel Aviv District Court issued a ruling recently on a case concerning a bank’s conduct with funds whose source is digital currencies. The court expressly ruled that the bank’s blanket ban on the opening of bank accounts by clients engaging in digital currency activity is unreasonable.

 

In April 2018, Union Bank of Israel decided to close the account of Israminers Ltd., an Israeli crypto-mining company, after the bank refused to accept monies originating from the conversion of digital currency into fiat money. In response, Israminers filed a lawsuit, alleging that the bank’s decision was unreasonable pursuant to the provisions of section 2(a) of the Banking Law (Customer Service), 1981.

 

The court ruling outlines principles enabling companies engaging in digital currencies to prove to banks that they are compliant with the banks’ obligations pursuant to legislation prohibiting money laundering and terror financing.

 

The court reviewed the digital currency sector and the inherent risks of money laundering and terror financing. The court ruling stated that a currency mined or received from a known and identifiable source (“digital currency trail”) raises no concern of money laundering or terror financing, as opposed to digital currency activity whose origin is unknown, which does raise suspicion or could pose a risk of money laundering.

 

The court also differentiated between the conversion of digital currencies into fiat money through a converter whose identity is known and when the source of the currency is also known, and conversion through an exchange by an unknown source (“money trail”). While conversions through a known converter do not expose the bank to any risk, conversions through an unknown source, as was done in this case, do give rise to a risk of money laundering. Consequently, the court ruled that the bank’s refusal to accept monies when there was a risk of money laundering was reasonable.

 

Nevertheless, the court ruled that the bank’s decision to close the company’s bank account was unreasonable and thus void.

 

The court did not rule out the possibility of using an exchange in the future, as long as a Know Your Customer (KYC) procedure is performed in a way that enables identification of the buyer of the digital currency with fiat money, as well as the source of the money.

Tags: Digital Currencies | Digital Currency Trail | KYC | Money Trail