Last week, "Globes" reported that the Commissioner of Capital Markets, Insurance and Savings, Moshe Bareket, had written to the Israeli representative office of the world's largest crypto exchange, Binance, requiring the exchange to regularize its activity in Israel in order to continue operating here. As far as is known, Binance has not applied to for a license to operate in Israel, unlike other entities operating here in this field, among them local exchanges Bit2C and Bits of Gold. Nor does it hold a provisional permit. The Capital Markets, Insurance and Savings Authority said that until Binance obtained an operating license, it would have to halt its marketing to Israelis and all activity focused on Israel.
Israel is not the only country in which the authorities have intervened in Binance's activity. It was preceded by many other countries, among them the US, the UK, Canada, Germany and several countries in the Far East. Why is this happening, and what are the implications for Israelis who have invested via this exchange?
Binance was founded in 2017 by Changpeng Zhao, who serves as its CEO, and who is one of the wealthiest people in the world. Binance is the world's largest crypto exchange, with 30 million customers, and a complicated and elusive ownership structure. It was founded in China, but left there when Chinese regulators banned crypto activity in the country. Binance said that it did not want to fix its residence in any one place, but to be decentralized, in the same way as the market in which it operates is decentralized. It has, however, run into difficulties with more and more regulators.
These difficulties include lack of a license to operate in a country, failure to abide by money laundering prevention and "know your customer" rules, claims of manipulation, and the claim that the exchange offers currencies that are in effect securities, without appropriate procedures.
Cryptocurrencies are of two broad types: currencies that are considered investment assets, mainly use for accumulating value and for transfers, and currencies that offer additional functions such as voting rights, right to participate in the profits of the project that issued them, and so on. These latter currencies are considered to be, in effect, securities, and various regulatory permits are required before they can be offered to the public. Binance is one of the exchanges that are rapidly expanding the offerings of assets traded on them, and the claim is that some of these assets are actually securities.
As a trading platform, Binance is a one stop crypto shop. It offers a trading exchange, DeFi (decentralized finance) services, futures trading, investment in leveraged financial assets, and so on. Binance has also issued two currencies: a stable currency linked to the dollar, and a currency called BNB, which is one of the ten leading cryptocurrencies in the world, with a market value of some $60 billion.
In recent years, Binance has targeted Israeli investors, in the same way as it operates in other countries, but unlike leading international exchanges such as Coinbase and Kraken (both of which are regulated), in which an Israeli who wants to trade goes into the international platform. In Israel, Binance set up a website in Hebrew with marketing aimed at Israelis, and a matching trading app in Hebrew, and allowed crypto purchases cleared through credit cards in shekels. It offered a large selection of currencies, unlike the local exchanges that mainly focus on Bitcoin and Ethereum.
All this made Binance extremely attractive, and it became one of the most popular exchanges in Israel, particularly in the past couple of years, during which cryptocurrencies have started to become part of the portfolios of small investors, who saw Bitcoin soaring in value and didn't want to be left behind. Market estimates put the number of Israelis who have carried out transactions via Binance at about 200,000. In the past, Binance even allowed purchases of cryptocurrencies without any identification procedures. It now requires customers to provide identification documents as a condition for trading.
"The lack of 'know your customer' procedures is one of the reasons that many countries restricted Binance's activities, and Binance therefore changed its policy last year," says Adv. Guy Seroussi, who specializes in cryptocurrencies. "Nevertheless, there are many additional regulatory problems in its activity that have not been solved."
It's actually the very lack of bureaucracy that Binance offers that creates a problem for those who trade on its platform. Because the exchange is not regulated and does not comply with anti-money laundering rules, Israelis that trade on it find it very difficult to convert the money and put it back into the banking system. It is by no means certain that Israelis caught by Binance's marketing efforts are aware of the difficulties that they will encounter later on.
"A critical mass has accumulated of Israeli investors who turned to Binance because of the convenience and accessibility of its trading platform, and are actually trading on a non-regulated exchange," Seroussi says. "These Israelis should know that one of these days they will find themselves with a problem, when they want to return their money to the banking system. It is very doubtful whether they will be able to do so."
Until recently, banks in Israel made life altogether difficult for crypto investors, and refused to accept money from any such source whatsoever. This approach changed last year, when a money laundering prohibition ordinance was adopted that applied to entities dealing in cryptocurrencies. Under the ordinance, such entities received provisional permits from the Commissioner of Capital Markets, Insurance and Savings, and applied for licenses. Concurrently, the Banking Supervision Department at the Bank of Israel issued guidelines for Israeli banks for managing cryptocurrency risks.
On the one hand, this meant that the banks could not continue to refuse wholesale to accept money from crypto sources. On the other hand, the banks were required to monitor and manage the risk involved in such transactions. One of the main tools for assessing risk by the banks is examination of licensing: was the trade carried out though a regulated entity with a license obtained in Israel or overseas, or a provisional permit (since no exchange operating in Israel has yet received a permanent license), or was it through private wallets or unlicensed entities?
When trading via an entity with a license or permit, the customer has to show that the path of the money used in the crypto trade is via regulated entities, in order to be able to transfer the money back into the banking system. Without this, transferring the money back into the traditional banking system will be much more difficult, and may even be impossible in some cases, particularly when large sums are involved.
It should be emphasized that what Binance has been prevented from doing is targeting of Israeli customers, that is, maintaining the website in Hebrew. If Israelis wish to continue to trade through Binance, they can do so, but only on the international website, without direct payment in shekels, as with trading on other international exchanges. For Israelis who have already bought cryptocurrencies via Binance, whether they have left the money in their account on the exchange or whether they have transferred it to their private wallets, there is no change in the status of their investment. They will, however, be required to provide explanations when they seek to convert the cryptocurrency coins back into fiat currency and deposit the proceeds in their bank accounts.
Published by Globes, Israel business news - en.globes.co.il - on February 23, 2022.
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