Knesset begins grappling with cryptocurrencies

The Knesset on Monday began exploring how to deal with the recent explosion of cryptocurrencies, with financial regulators urging caution while lawmakers saw great potential in the new digital money.

At a hearing called by opposition leader Isaac Herzog and held in the Knesset’s powerful Finance Committee, the panel’s chairman MK Moshe Gafni instructed Israeli regulators to submit their recommendations in 45 days on taxing cryptocurrency, prohibiting money laundering and terror financing, and protecting investors.

He also called on Israeli representatives of the cryptocurrency giants — including bitcoin and Ethereum — to submit an overview on how they would like to see Israeli regulation.

“After doing my homework, it became apparent that this is a phenomenon that might be cast aside but might also very well gain momentum and become a central issue in our financial lives,” said Gafni, of the United Torah Judaism party.

He ordered officials from the Israel Tax Authority, Israel Securities Authority, and Israel Money Laundering and Terror Financing Prohibition Authority to swiftly outline new guidelines on the use of digital funds.

Chairman of the Finance Committee Moshe Gafni leads a meeting at the Knesset in Jerusalem on September 6, 2016. (Yonatan Sindel/Flash90)

“Let it be clear: The Finance Committee has started dealing with this, and we demand the regulators hasten their staff to formulate their position on the matter,” said Gafni. “It’s possible there is great economic potential here. In any case, the train has already left the station and we demand a position swiftly be drafted.”

The committee chairman also embraced the notion that cryptocurrencies could undermine the banking system and banking fees, noting that the committee often deals with the struggle of “the citizens vs. the banks.”

“The digital currency could solve this problem,” he added, hinting at a phasing-out of banks altogether.

Prime Minister Benjamin Netanyahu last month similarly predicted banks would become passe.

“Will all the banks ultimately disappear? The answer is yes,” Netanyahu told reporters in mid-December. “Should it happen tomorrow? Should it happen through the bitcoin? It’s a question.”

Bitcoin is a virtual currency created from computer code. It and other virtual currencies use blockchain, which records transactions that are updated in real time on an online ledger and maintained by a network of computers.

Its value surged as high as $19,500 in December from around $1,000 last January, but has slipped back after a series of warnings from governments and analysts about the risk and volatility associated with cryptocurrencies. Many analysts regard the bitcoin’s spectacular surge in value as a bubble, rather than a sign it could be a digital competitor to existing currencies.

‘It’s certainly not a currency’

Dr. Shlomit Wagman, acting head of the Israel Money Laundering and Terror Financing Prohibition Authority, warned Knesset members on Monday of the prevalent use of cryptocurrency by both criminals and terrorist organizations.

“The global opportunities presented by the bitcoin are obvious, but there are significant dangers for money-laundering, similar [to the dangers posed by] cash,” said Wagman. “There is no geographic identification; it bypasses financial institutions and countries. Terror groups use these platforms and therefore this requires a deeper examination.”

However, Wagman said she was not advocating a ban on cryptocurrency, but merely enforcement of anti-money laundering regulations on the digital currencies.

Israel Securities Authority chairman Shmuel Hauser at a Finance Committee meeting in the Knesset on September 11, 2017. (Miriam Alster/FLASH90)

Also addressing the panel was outgoing Israel Securities Authority chief Shmuel Hauser, who doubled down on his proposed plan to prevent cryptocurrency companies from being included in Tel Aviv Stock Exchange indices for two years.

“I think that one of the greatest dangers is precisely the digital currencies, which also have incredible potential,” said Hauser.

Citing the wildly fluctuating value of the cryptocurrency and the buying frenzy surrounding the products, Hauser said the trend “troubles me.”

He also briefly noted fraudulent schemes surrounding cryptocurrency.

“The most important thing is that investors know there is someone protecting them,” he said.

Bitcoin (AFP Photo/Karen Bleier)

Regulators addressing the panel on Monday were insistent the cryptocurrency was not a currency.

“In the meantime, we are treating it as a financial asset, but today, it is certainly not a currency,” said the Bank of Israel’s Deputy Governor Nadine Baudot-Trajtenberg, stressing its volatility, anonymity, and private ownership.

That sentiment was echoed by the Tax Authority’s Moshe Asher, who said “bitcoin is an asset,” and therefore liable for taxation. He said the Tax Authority will soon roll out its recommendations on taxation for cryptocurrencies.

But cryptocurrency investors implored lawmakers to seek “friendly” regulation and avoid squandering what they described as a “revolutionary” opportunity.

“There is a huge revolution here, on the scale of the industrial revolution, of the invention of electricity,” said Yoni Assia, CEO of the eToro investment network.

The “revolution,” now in its “very beginning stages,” will “be written in the history books that our children and grandchildren and great-grandchildren will read about what is happening now,” he added.

There is an opportunity here, he added, to create new economic institutions “on a scale Israel has never seen.”

Simona Weinglass and AFP contributed to this report.