Today, a money laundering prevention ordinance comes into effect that will apply to all providers of financial services: fintech companies, credit providers, and cryptocurrency companies. Entities providing these services will be subject to obligations designed to prevent them from being used as means to launder money or finance terrorism. The ordinance paves the way to the award of permanent licenses to dealing in digital currencies. The regulator responsible, the Commissioner of Capital Markets, Insurance and Savings, is however still in the process of examining the various cryptocurrency entities that have filed license applications.
The Money Laundering Prohibition Ordinance sets rules on identification and verification of those receiving service and for carrying out a "know your customer" procedure, requirements for reporting to the supervisory authorities on those receiving service, including regular and exceptional activity and exceptional events at the service provider, risk control and monitoring, records, retention of documents, and other matters. The ordinance lists various conditions for opening an account with remote customer identification, so that fintech ventures will be able to operate more easily without the need to meet customers face to face.
In addition, the ordinance sets out rules for electronic transfer of money and digital currency within Israel and outside it. The Capital Markets, Insurance and Savings Authority has also published a draft circular on management of money laundering and terror financing risk that will apply to all providers of financial services regulated under the ordinance. The draft supplements the ordinance's provisions.
Up to now, anyone investing in cryptocurrencies would have had difficulty in transferring the profits to a bank, because of the fear of money laundering. Now, the banks will formulate an orderly policy designed to enable them to receive the money if the trading took place with an entity meeting the requirements of the ordinance and holding a license. Bank Hapoalim and Bank Leumi have already formulated such a policy, requiring certification by an accountant, a lawyer, or a cryptocurrency expert that the cryptocurrency transactions were compliant with all the requirements of the Money Laundering Ordinance, together with documentation of the transactions.
"If you trade with entities overseas and want to put the money back into the financial system in Israel, it is recommended that you should trade only with supervised, licensed entities that meet the money laundering prohibition rules of the FCA in the UK or of the New York State Department of Financial Services BitLicense," says Tomer Ravid, founder and CEO of BloxTax, which provides regulatory services to cryptocurrency investors.
One of the conditions of the ordinance is tracking the money - where it came from, and where it was at each stage. In trades with supervised entities, that's simpler, but in trades or transfers between wallets, greater caution is called for. "It's always recommended to keep documentation of the transfers: wallet addresses, appropriate documentation, and in general to maintain a clean wallet, that is, a wallet in which the transfers in and out are only from and to supervised entities or different wallets of the investor himself. It's important to understand that wallets should be treated as though they were bank accounts, and so it's worth avoiding transactions that you wouldn't carry out on your bank account," says Ravid.
Cryptocurrency trading ranges from the classic digital currencies to NFT (non-fungible token) and DeFi (decentralized finance), and it is necessary to be aware of the taxation and money-laundering rules that apply to them. "Currency conversions are a tax event, and that includes purchase of NFT or cryptocurrencies. In addition, all the money-laundering rules apply here as well. The challenge is that most trading platforms for NFT and nearly all the DeFi protocols do not maintain 'know your customer' procedures, and so for the banking system it's a major challenge to receive money originating in this kind of activity. We recommend anyone who wants to trade in DeFi and NFT to maintain structural separation in their investments, to carry out all the transactions from a separate digital wallet from the rest of the activity, in order for at least part of the activity to be compliant with the money-laundering prohibition rules," Ravid says.
Published by Globes, Israel business news - en.globes.co.il - on November 14, 2021.
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