An Israeli District Court recently ruled that Israeli banks are not obligated to provide financial services to companies whose primary business is trading in cryptocurrencies, such as Bitcoin or Ethereum. The Court reasoned that banks should not have to assume the risks associated with providing a financial platform to these digital currency businesses when the leading Israeli authorities on the subject, namely the Central Bank, the Securities Authority, and the Anti-Money Laundering and Terror Financing Authority, themselves have been struggling to delineate clear measures to minimize them.
One of the primary risks Israeli authorities and other regulators around the globe noted is the pseudo-anonymous nature of cryptocurrency holdings. Regulators view the digital token transfer method as a “black box”, low in accountability and virtually impossible to subject to existing anti-money laundering (AML) and anti-terror financing regulations. However, built-in features of cryptocurrencies, specifically their underlying blockchain technology, have the potential to improve, not harm, AML efforts, even surpassing mechanisms already in place today.
The growing tension between the fast-growing cryptocurrency industry and AML guidelines is fueled by several factors, beyond Bitcoin’s somewhat misguided reputation as a favorite of hackers and criminals, the primary of which is its structure. The current AML system was originally tailored to address existing centralized financial services systems. By default, these guidelines cannot account for a finance system based on intrinsic anonymity. Rather, AML relies on the ability to monitor and exploit the Know Your Client (KYC) process, identifying information that every financial institution is required to account for by law.
The AML monitoring mechanisms currently in place attribute every transaction to a preidentified legal entity. Data tracked in a fiat money paper-trail includes: (a) the financial system entry point, i.e. opening bank account, and (b) any transaction within the system, for example, sending money from one bank account to another or use of swift platforms. The systems then monitor the financial activity, evaluate the AML risks associated with such transactions, and follow up with any relevant notifications and reports. Use of the financial proceeds of a crime, when identified, can be easily attributed to a particular person.
Critics of cryptocurrencies point to the lack of identifying information throughout digital transactions as a substantial obstacle to existing AML surveillance and enforcement capabilities. However, all of the essential regulatory and enforcement elements — identifying parties and information, a record of the transaction, and even enforcement — can exist in the cryptocurrency system. It’s all a matter of adjusting perspective.
First, a cryptocurrency accounts for …
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