Written by Tal Ron
A precedent ruling was issued by the court in a lawsuit filed against Mizrahi Tefahot Bank’s blanket refusal to deposit digital currencies into an account, which stated that the bank has the responsibility to carry out an individual examination for each customer. The court also demanded that a proper plan be prepared on the matter of digital currencies.
Recently, a ruling was issued by the Tel Aviv-Jaffa District Court, in a petition for certification of a class action in relation to the blanket refusal of Mizrahi Tefahot Bank to deposit funds into its customers’ accounts that originate from the realization of virtual currencies, without checking each request and without performing a risk assessment. In the ruling, the court stated that the Bank’s policy of adopting a blanket refusal to provide banking services originating from trading in virtual currencies, without performing an individual inspection, is, seemingly, unreasonable. The court also stated that although the applicant seemingly presented an evidentiary basis that would substantiate a cause of action, it is not found to be suited for adjudication as a class action.
As part of the request, the plaintiff asked to convert bitcoins in his possession in his bank account; however, the Bank rejected his request and refused to accept the shekel conversion deposited into his account. Accordingly, the applicant claimed that the Bank violated the obligation imposed on it by virtue of Section 2 of the Banking Law, which refers to customer service, after refusing, in a sweeping and unreasonable manner, to allow the deposit of funds derived from the realization of virtual currencies of the Bitcoin type, without examining the request on its merits.
The Bank claimed in response that banking services for the purpose of carrying out transactions in virtual assets are not within the scope of essential services included in the Banking Law and that it has not been proven that a blanket prohibition policy for receiving funds originating from trading in virtual currencies violates the Law. Alternatively, the Bank claimed that it must be established that its policy is at least reasonable considering the risks to which it is exposed.
After the parties filed their summaries (in March 2021), an amendment was published to the Prohibition of Money Laundering Order (Identification, Reporting and Record-Keeping Duties of Credit Service Providers to Prevent Money Laundering and Terror Financing), which imposes various obligations in the area of the prohibition on money laundering on the entities that are required to obtain a license of financial asset service providers in accordance with the Financial Services Supervision Law, which includes the virtual currency service provider sector. Later, the Bank of Israel also published a draft amendment to Directive 411, which mainly put forward the determination that banks will no longer be able to sweepingly refuse to provide services related to virtual currencies without justification and will be required to take steps to assess the risks involved in the deposit.
After hearing the parties’ claims, the court found that a blanket refusal policy without performing an individual “know your customer” check, including the source of the funds, in order to determine the risk rating involved in the activity, is unreasonable.
Despite this, the court stated that in view of the regulatory regulation in the field of providing services related to virtual currencies, the claim has been exhausted and there is no interest in conducting the claim. The court further ruled that the claim is not suited for class action adjudication, due to the differences between the members of the class and in particular the differences in the specific circumstances between each customer, which will require an individual and informed examination in relation to each of its members.
The ruling also highlighted the difficulties faced by many customers whose field of business is related to virtual currencies vis-a-vis the banking system, and also the difficulty faced by the banking system, which is forced to make decisions in parallel with developing and unregulated regulation.
Although the court did not certify the action as a class action, it seems that the ruling promotes the status of those dealing in virtual currencies and the importance of proper banking conduct in relation to them. We believe that this ruling and cases similar to it which are reaching the courts with increasing frequency, in view of the increase in the use of virtual currencies in Israel and abroad, will force the regulatory authorities to promote comprehensive and detailed regulatory procedures on the matter, which will provide a clear answer to all banks and their customers.
On November 27, 2022, an appeal was filed by Mr. Yuval Amir, and on December 6, 2022, the Supreme Court’s decision was given, which set the hearing of the appeal for June 21, 2023.
