District Court Orders Bank Hapoalim to Accept a Deposit of Proceeds from Sale of Digital Currencies into Client’s Account

In April 2018, a District court ruled that a Bank Hapoalim client could receive monies into his account stemming from proceeds for the sale of Bitcoins.

The case began when the client sought to transfer funds into his bank account in Israel that had originated from a sale of Bitcoins transacted outside of Israel. The client’s Bitcoins had been held in his digital wallet, and their sale was transacted through a cryptocurrency exchange. The client then sought to transfer the proceeds of the sale of his Bitcoins from his digital wallet into his account at Bank Hapoalim.

The bank refused the client’s request, alleging exposure to violations of anti-money-laundering laws, claiming it is not possible to ascertain the source of the funds in instances of digital-currency transactions. The client forwarded documents to the bank attesting to the source of the funds he had used to purchase his Bitcoins and proving the sale had been reported to the Israel Tax Authority.

The bank remained adamant in its refusal, arguing that these documents are insufficient for it to accept and deposit the funds into the account. The bank then contended there has been an uptrend in compliance risks at financial institutions in recent years (including in relation to money-laundering risks), which have also become manifest considering the high volumes of penalties imposed. The bank also presented the Bank of Israel’s references to activities with digital currencies as high-risk activities, and to the lack of suitable regulations.

The court examined the damage liable to be caused to the client if the bank refused to accept the funds and deposit them into his account, as well as the damage that would result from the funds being returned to their source (to the bank account of the digital wallet outside of Israel, through which the transaction was executed). The court acceded to the client’s motion and issued an interlocutory order obligating the bank to accept the funds, while implementing the recent guidelines prescribed by the Israeli Supreme Court in the Bits of Gold case. In that case, the Supreme Court ruling supported Bank Leumi’s refusal to allow virtual currency trade transactions in a bank account, at the expense of the tangible damage liable to be caused to the client due to the Bank Leumi’s refusal. In essence, the court acknowledged the theoretical risk liable to be caused to the bank as a result of approving such a transaction, and the demand that the client must provide a bank guarantee in favor of the bank.

In light of the District court ruling, and as the Supreme Court already deliberated in the Bits of Gold case, it appears the courts in Israel, which are public bodies, are more open to technological advancement – including in relation to digital currencies – than the banking system in Israel, which is a business-private entity that should theoretically also recognize business and technological developments.

Even though this judgment does not deliberate the question of activity with virtual currencies – rather only the particular instance of a bank preventing a client from transferring money into his account – it is still a judgment that promotes discourse on the subjects of online banking and cryptocurrency trading.