Israeli Banks Permitted to Bar Bitcoin-Related Banking Activities

Can Israeli commercial banks refuse to allow companies engaging in Bitcoin trading to use their bank accounts for transactions related to Bitcoin trading? In a landmark decision issued earlier this month, an Israeli district court answered this question in the affirmative.

The petitioner, Bits of Gold Ltd., is an Israeli company dealing in Bitcoin trading. It opened a bank account with Bank Le’umi LeIsrael, one of Israel’s largest and leading commercial banks. The account itself was not used to deposit Bitcoins and Bitcoins were not transferred through the account. The company merely used the bank account to deposit US Dollars and Israeli Shekels paid by those seeking to purchase Bitcoins, and to withdraw US Dollars and Israeli Shekels to transfer them to accounts of sellers selling Bitcoins. The account was also used for currency conversions between the US Dollar and the Israeli Shekel.

The company petitioned the court due to the Bank’s demand that the company cease all account activity related to virtual currency in general and Bitcoin in particular. The Bank indicated that on several occasions, hackers had hacked into various accounts in other banks and wired money from those hacked accounts into the company’s bank account. The court made it clear that there is nothing to suggest that the petitioning company was involved in any way in hacking the accounts in those other banks. In fact, the petitioning company identified some of these hackings, assisted the bank in pinpointing the stolen money and cooperated with the bank’s efforts to return the stolen amounts to their rightful owners.

The court then went on to analyze the main question in dispute – whether the petitioning company’s Bitcoin-related activities exposes the bank to elevated risks.

The petitioning company argued that its regulatory permit to act as a currency service provider mitigates the risks involved in its Bitcoin-related activities. The court disagreed, holding that such a permit is required due to the company’s currency conversion activities on the US Dollar and Israeli Shekel. The court explained that such a permit is not directly related to Bitcoin activities extrinsic to the company’s bank account, particularly given the questionable status of the Bitcoin is a “currency”, let alone foreign currency.

The court also addressed the identifiability of the parties transacting in Bitcoin in connection with the company’s bank account. The court explained that while the identities of transferor customers depositing money into the account are known, the main difficulty arises in identifying the transferees.

The main issue before the court was whether these circumstances allow the respondent bank to bar Bitcoin-related activities in the company’s bank account. On the one hand, the Israeli Banking Services Law (Service to Customers), prohibits a commercial bank from refusing to provide certain banking services, including opening and maintaining a current account, as long as the customer’s balance remains in surplus and the customer satisfies all other contractual terms governing the account. Case law has held that banks may refuse to provide certain banking services if such refusal is reasonable under the circumstances.

The court took notice that of a rare joint public statement issued in 2014 by the Bank of Israel (Israel’s central bank), the Israeli Tax Authority, the Israeli Securities Authority and the Israeli Anti-Money Laundering Authority, regarding possible risks entailed in distributed virtual currencies.

The court held that under these circumstances, the bank is positioned between a rock and a hard place. On the one hand, if it permits the Bitcoin-related activities, it may violate its obligations under the Israeli Anti-Money Laundering law, due to the inability or incapacity to manage the risks involved with Bitcoin trading, as announced in the 2014 joint public statement by the various Israeli authorities. On the other hand, if it bars the Bitcoin-related activities, it may violate its obligations under the Israeli Banking Services Law (Service to Customers).

In these circumstances, the court held that any decision the bank makes with respect to the company’s Bitcoin-related activities would be within the permissible zone of reasonableness, and the petition was therefore dismissed.

The court decision (in Hebrew) is available here.