BoI, Treasury warn on Bitcoin risks

"Bitcoins lead to high-risk activity in terms of money laundering and terror financing."

The public should be aware of the unique risks inherent in the use of decentralized virtual currencies, such as Bitcoin and display heightened awareness and caution, state the Bank of Israel and the Ministry of Finance in a joint statement today, following similar warnings by regulators in the US, Canada, and the EU.

The Bank of Israel and the Ministry of Finance point out that virtual currencies are not legal tender, not issued by a central bank or backed by a central bank, which guarantees the nominal value of currency it issues, and acts to maintain confidence in it. Therefore, there is no requirement to accept them as payment for any asset or service or as repayment of a financial loan.

Secondly, because transfers of virtual currencies can be anonymous, they can be used to evade the need to use financial institutions that are subject to an anti-money laundering and terror financing prohibition regime, resulting in high-risk activity in terms of money laundering and terror financing. Therefore, financial institutions must take this into account within the framework of their risk management policy, including with regard to reporting to the Israel Money Laundering and Terror Financing Prohibition Authority.

Thirdly, the unique characteristics of virtual currencies are liable to present fertile ground for fraudulent activities, such as Ponzi schemes. Fraud of this and other type use technology, innovative products, and rapid growth of industries to draw in additional people to invest their funds, with the understanding that potential investors tend to be less suspicious due to a lack of familiarity with what is being offered, and their trust in the promise of the innovation offered to them. Likewise, transactions in decentralized virtual currencies cannot be cancelled, and from the moment a sale takes place, the value paid can no longer be returned. Therefore, their use as means of payment is exposed to fraud such as not supplying the product or service, in which after payment is transferred, the supplier or service provider does not provide anything in return.

Fourthly, the value of virtual currencies such as Bitcoin is given to especially high volatility. The value of a Bitcoin, for example, increased sharply over a specific period, but it is also liable to sharply decline rapidly, as has already happened. Such volatility affects both investors in the virtual currencies as well as people who wish to use them as means of payment, whether as a customer or as a supplier. This is because the volatility affects the willingness of businesses or service providers to accept such virtual currencies, in light of the fact that most of the economy continues to use the domestic currency.

Fifthly, transactions using decentralized virtual currencies are open and are conducted directly via peer-to-peer networks. However, the sides in a transaction remain anonymous, which often makes it difficult to trace them. This anonymity is liable to be exploited for criminal activity, including money laundering, financing illegal activities, and financing terrorism. Law enforcement authorities are therefore likely to close trading platforms in virtual currencies which are used for illegitimate activities, by preventing access or use of customers’ capital, which would likely be held by those platforms.

Sixthly, virtual currencies are generally stored on computers or smartphones, and there have been cases reported of hacking into computers and stealing large sums of Bitcoins. In addition, their loss or a forgotten password is liable to lead to the absolute loss of the value stored on the computer or phone.

The Bank of Israel and the Ministry of Finance also warn of the risk of loss of money in trading platforms. Virtual currencies can be purchased directly from someone who holds them, through a trading exchange or via conversion services. These trading exchanges and conversion services generally do not operate under a designated license or relevant oversight. In several cases these entities ceased their operation due to a breach by third party, and the value of the virtual currency held there disappeared. Likewise, such services expose their users to a wide range of additional risks resulting from operational instability, information security failures, and lack of regulatory certainty which characterizes their operations.

Finally, the Bank of Israel and the Ministry of Finance warn of the lack of supervision over trading in virtual currencies, which is not supervised by any Israeli government authority. They point out that Israeli traders in Bitcoins and similar products who are listed as currency service providers at the Ministry of Finance, are not listed there with regard to trade in virtual currencies, but only to related activities. The Israel Securities Authority also does not oversee trading in Bitcoin or similar products or in securities for which they serve as their underlying assets.

Published by Globes [online], Israel business news - - on February 19, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018