Bitcoin is Not a Currency, Says Israel Central Bank Deputy Governor

News, Regulation | January 10, 2018 By:

Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg has said that the central bank will not recognize cryptocurrencies such as bitcoin as actual currency.

In a meeting of the Knesset Finance Committee on Monday, Baudot-Trajtenberg said that bitcoin and other cryptocurrencies are not a currency. The official explained that a critical element that exists in currency is the measure of confidence that users have in it. This confidence is derived from the fact that the currency is legal tender with legal backing.

“Bitcoin and similar virtual currencies are not a currency, and are not considered foreign currency,” said Baudot-Trajtenberg. “The Bank of Israel’s position is that they should be viewed as a financial asset, with all that this entails. A currency fulfills the functions ascribed to it in the economic literature — a unit of account, an mean of payment, and stability that enables it to serve as a store of value. None of these exist with bitcoin or similar currencies, which are characterized by higher volatility, difficulty in making transactions, and a lack of certainty regarding the parties that stand behind it.”

Baudot-Trajtenberg is also concerned about the anonymous nature of cryptocurrencies. She said they may be used to launder money and finance crime, adding that the banks need to take necessary measures to combat fraudulent activities involving cryptocurrencies.

“A customer wishing to transfer his money to an exchange where virtual currencies are sold may later transfer the money anonymously to any unreliable party in Israel or abroad,” she said. “If the money is used for an inappropriate purpose, the bank that made the transfer may bear responsibility toward law enforcement authorities in Israel or abroad. Therefore, every bank must define whether it will provide services to customers in this area, and if so, how the risks will be managed.”

Baudot-Trajtenberg added that the central bank was studying the issue of cryptocurrencies, but noted that not much can be learned from international practices since no banking regulator anywhere in the world has issued guidelines to the banking system on how to act in relation to customers’ activity in digital currencies.

“Our assessment is that this indicates that there is a real difficulty in issuing sweeping guidelines to the system regarding the proper way to estimate, manage, and monitor the risks inherent in such activity,” said Baudot-Trajtenberg. “As such, at this stage, the Banking Supervision Department cannot provide a response for customers whom the banks refuse to allow converting the money in their accounts into virtual currencies.”

Last month, the Israel Securities Authority (ISA) banned cryptocurrency companies from trading on the Tel Aviv Stock Exchange (TASE). ISA chairman Shmuel Hauser said they would not allow cryptocurrency companies to trade on TASE. If already listed, its trading will be suspended. Hauser also said that bitcoin behaves like a bubble and they don’t want investors to be subject to that volatility and uncertainty.