Crypto Currency / Bitcoin
Digital Currencies, Cryptocurrency, and Bitcoin
In recent years, there has been a financial revolution in the digital world, changing the rules of the game regarding how money is managed and transferred. The realm of digital currencies, based on blockchain technology, such as Bitcoin, Ethereum, Tether, and others, allows for the first time the acquisition and trading of assets (cryptocurrencies) in a virtual world freely, without limitations and constraints of the regulated banking system.
What is a Digital Currency?
In 2008, following the financial crisis, an anonymous entity named Satoshi Nakamoto proposed the idea of stripping central governments' authority to mint coins and transferring the power to the public. This was done by creating a global currency, purely digital and computer-based, issued and controlled by its developers, utilized by a specific global virtual community. This currency could only be produced in limited quantities and its possession and associated data would be distributed across all computers participating in the network.
A digital cryptocurrency is an alternative means of exchange that is entirely virtual. Every transaction involving a digital currency is processed and stored in a distributed ledger on the network.
Currently, there are around 17,000 types of digital currencies. There are three main categories of digital currencies: payment cryptocurrencies like Bitcoin, which function as a medium of exchange similar to traditional currencies like the Shekel and the Dollar; utility tokens issued by service providers, for example, in computer games, allowing specific actions within the game; and security tokens representing financial rights on assets such as securities or real estate.
Regulation of Digital Currencies and Oversight
In 2001, financial regulators in Israel published rules and regulations in the field, aiming to keep up with technological advancements and adapt to financial legislation.
Regulation today mainly focuses on the following areas:
- Defining when it's a currency and when it's a security.
- Taxation regulations on profits from the field – Digital currencies are considered financial assets, and since 2018, tax authorities require reporting and payment of taxes on activities involving digital currencies.
- Addressing the interface points between cryptocurrencies and the traditional financial system in terms of anti-money laundering (AML) and know your customer (KYC) regulations.
- Supervision and comparison of regulated and stable cryptocurrency markets against digital currencies to ensure market stability and protect traders.
Challenges and Criminal Exposure in Using Digital Currencies
- Criminal use: Being an international currency, easily transferable and anonymously held in a digital wallet identified only by a digital address (as opposed to institutional wallets registered on licensed cryptocurrency exchanges), digital currencies provide an efficient solution for money laundering—economic transactions can be concealed by converting funds into digital currencies, making it challenging to trace the source of the funds.
- Platform for money laundering activities: Using digital currencies does not go through the regulated banking system, which imposes identification and reporting obligations on money laundering activities. Economic transactions with the goal of money laundering can find an efficient solution by converting funds into digital currencies—an operation that hinders the discovery and tracking of the source of funds.
- Volatility: There is currently no widely accepted model for evaluating the value of digital currencies, making their value highly volatile.
- Cybersecurity risks: Digital currencies are held in a digital wallet, which, while enabling accessibility and ease of trade, is vulnerable to hacks and thefts.
Deposits in the Regulated Banking System: On December 30, 2021, draft instructions for banks were issued by the Bank of Israel. Banks' supervisors were explicitly stated that a banking institution cannot unreasonably refuse to accept and deposit a digital currency, and it must perform a risk assessment and management regarding the transaction's circumstances. The draft instructions also specified that banks would establish defined standards for the customer's proof of the digital currency's source.
If you are under investigation for suspected economic offenses related to digital or virtual currencies, it is essential to consult with a lawyer specializing in the field before the investigation. The Cryptocurrency Lawyers' office, led by Ronen Rosenblum, specializes in economic offenses, including digital and cryptocurrencies, in their various forms.