Israel Beefing Up Crypto and Money Laundering Regulations

Israel’s Authority for Combating Terror Financing and Money Laundering has announced a tightening of regulations applying to the crypto and Fintech sectors.

Israel is upping the ante in its fight against cryptocurrency crime. The Authority for Combating Terror Financing and Money Laundering announced via the authority director that new regulations have come into effect to combat criminal activity and normalize the use of cryptocurrency and other FinTech products. According to authority director Shlomit Wegman, the application of these regulations will help to establish order and clear standards

The regulations are a direct result of standards imposed by the Financial Action Task Force in 2018. The Financial Action Task Force consists of 39 members and a global network of FATF-style regional bodies that collectively encompass 200 jurisdictions.

Wegman is optimistic that the new regulations should aid compliant crypto companies by setting at ease the minds of potential customers. It also takes away the unenviable task of self-regulation. Due to the previous lack of regulatory oversight and the speed at which money can be moved between different crypto entities, money laundering previously flourished in Israel. 

Crypto companies are now required to submit reports like banks, and comprehensive client identification standards will be adopted to improve the granularity of digital paper trails. 

Israel’s adoption of cryptocurrencies has been rapid, prompting tax authorities to request the disclosure of crypto asset holdings by citizens in December 2020.

Israel intensifying its response to crypto crime

Israel recently partnered with the U.S. Department of Treasury to combat ransomware attacks, for which cryptocurrencies like bitcoin and Monero have become the prime choice of the extortioners.

Israel’s National Bureau for Counter Terror Financing recently seized cryptocurrency that had been transferred to the Hamas organization for use by the Hamas military wing, amongst others. This was preceded by an increase in cryptocurrency donations made to Hamas.

In this case, the interaction with crypto exchanges was the Achilles’ heel, making it easy for law enforcement to freeze criminal funds.

Combating money laundering in the digital age

Embezzlement in crypto tarnishes the reputation of a technological breakthrough designed to rebuild trust in a global economy shaken by the 2008 financial crisis. Regulation is key if crypto is to become mainstream and garner the trust of institutional investors. 

Money laundering in this particular sector mainly consists of three steps — placement, layering, and integration. Placing refers to deposits into financial institutions, layering to the transfer of funds between different accounts or the purchase of physical items, and integration to introduce the laundered funds into the economy through the sale of purchased physical assets, or through investments. 

Know-your-customer (KYC) regulations are one step in combating money laundering since the rules require multiple pieces of information to verify the identity of individuals involved in any transaction, or at any stage of a transaction.

Privacy-focused cryptocurrencies like Monero and Zcash are proving to be challenging for crypto entities to comply with respect to KYC, as these cryptocurrencies obscure the identity of the individuals involved in the transaction.

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