Bank of Israel issues draft guidelines on cryptocurrency AML/CFT

Private banks could be required to conduct risk assessments on case-by-case basis.

On Friday, the Bank of Israel published a draft regulation on Anti-Money-Laundering and Combatting the Financing of Terrorism (AML/CFT) risk management for the banks facilitating crypto-to-fiat transactions.

The move hints at the Israeli government’s preparations to legalize and regulate the relationship between banks and virtual currency service providers (VASPs). The document cites the customers’ increased involvement with digital assets as the rationale for the new policy:

“In view of the increase in customer activity in virtual currencies, and the resulting increase in customer requests to transfer money […] the Banking Supervision Department today published a draft circular dealing with managing AML/CFT risks derived from the provision to customers of payment services related to activity originating in virtual currencies.”

The regulator emphasizes the “high potential risk” of digital asset transactions due to the anonymity of digital wallets and stresses the need to establish mechanisms of money identification. For now, this task is divided into two major components: conducting rigorous risk assessments and clarifying “the source of the money used in the purchase of the virtual currency and the path through which the virtual currency passed” between purchase and conversion into fiat.

As the release clarifies, banks would only be allowed to deal with the entities holding a license to provide financial asset services issued by the supervisor of the Capital Market, Insurance and Savings Authority.

The draft amendment was sent to the Advisory Council on Banking Matters, which is expected to provide additional input that, along with public commentary, will be considered by the Bank of Israel in the process of finalizing the guidelines.

In November 2021, the Israeli government obliged VASPs to obtain an operating license from the Israel Securities Authority and the Capital Markets, Insurance and Savings Authority. With the AML/CFT guidelines for banks now on the table, the nation is moving even closer to getting a comprehensive framework for digital asset transactions.