In Israel’s Crypto Banking War, Lawsuits Lead the Charge (For Now)

It was a sunny morning in 2016 when Yuval Roash discovered that his business was in jeopardy. He hadn’t even had his morning cup of coffee before the postman came knocking with an urgent letter. The young entrepreneur’s cryptocurrency exchange, Bits Of Gold, was facing an ultimatum from Leumi, its primary bank: Stop conducting business with cryptocurrencies or we’ll bar you from our banking services.

The demand blindsided Roash.

“I thought, ‘This is unacceptable,’” Roash told Bitcoin Magazine. “We have clients and we were completely honest. It doesn’t make sense for us to stop offering cryptocurrency when we’re doing everything right and have been honest the entire time.”

Founding his exchange in 2013, Roash opened a business bank account with Leumi in the same year, stating that the business model was transparent from the start. He and his company would spend the next three years fighting the bank’s decision in a lawsuit that went all the way up to the doorsteps of the country’s Supreme Court. 

The suit first appeared in a district court in 2016, and after receiving a temporary injunction to keep its banking lifeline pumping, Bits Of Gold lost the case in 2017, prompting the company to appeal it to the Supreme Court. Receiving yet another temporary injunction in 2018, the company won the case just a few months ago.

But the legal protections granted to Bits Of Gold make it an outlier in the Israel cryptocurrency scene; it’s the only company to be legally guaranteed banking services. As such, the company’s banking saga has become emblematic of the cryptocurrency industry’s frustrating run-ins with a restrictive banking sector.

Mo’ Money, Mo’ Problems

That Bits Of Gold services an estimated 60 percent of Israel’s cryptocurrency investor population is, in some ways, a consequence of the exchange’s unique position as the only business of its kind with set-in-stone banking relationships. The Supreme Court decision, interestingly, also didn’t establish a clear legal precedent, meaning that Leumi and other banks aren’t legally obligated to provide services to other cryptocurrency companies — only to Bits Of Gold.

In lieu of stable banking options, other cryptocurrency service providers in the country (of which there are very few, Roash clarified) even “work through Bits Of Gold to process cryptocurrencies.” Failing this, they might turn to payment processors, though these rely on the traditional banking structure as well and risk the same denial of service.

This problem, of course, is the shared albatross of the macro cryptocurrency industry, but, in Israel, the problem is especially pronounced, given the dearth of banks in the country. 

“In the States, it’s much easier to jump from bank to bank as there are hundreds of banks. In Israel, there are about ten banks, and there hasn’t been a new one in the last 30 years,” Roash said.

A Taxation Catch-22

And in Israel, it’s not just the exchanges that are having issues. It’s the whole of the cryptocurrency investor community.

A recent report by Israeli news outlet Haaretz chronicles the banking headaches that the average cryptocurrency holder suffers in the country — and the taxation side effects these fiduciary migraines create.

Ron Gross, for example, was unable to cash in on his profits from buying bitcoin as far back as 2011. His bank, Hapoalim, refused to let him deposit the funds into his account in 2017. They were stuck in Switzerland, even as Gross met with his bank and shared over 70 pages of deposit records related to the provenance and flow of his bitcoin funds. Meanwhile, the tax authority placed a since-removed lien on his home, bank account and his moped because he couldn’t pay the capital gains tax on the bitcoin investment, which he reported in accordance to Israeli tax law.

“The tax authority is aware of the problem, but they say the ball isn’t in their court,” Gross told Haaretz. “I’ve tried working with almost all the banks, but the minute they hear the word ‘Bitcoin’ they freeze up.”

At the crux of the problem is the banking system’s reluctance to touch money related to cryptocurrency for the ostensible risk that it has been tainted by drug trafficking or money laundering. Even when law-abiding citizens like Gross go to extraordinary lengths to prove their innocence, the banks are leery of lending financial support.

The end result is a taxation catch-22 where investors can’t pay their taxes because they can’t deposit investment profits into their respective banks. And misery loves company. Gross, far from alone with this grievance, can commiserate with “at least half” of Israel’s crypto investor populace, according to Israel Bitcoin Association Founder Meni Rosenfeld.

One such investor, Roy Arav, is suing his bank to rectify the financially debilitating issue. The case piqued the attention of Israel’s attorney general, which called for a committee to be established to address discrepancies in how banks service the burgeoning cryptocurrency industry. Pending this committee’s recommendations, the suit is currently in limbo.

Most investors, Rosenfeld continued to tell Bitcoin Magazine, don’t have the economic resources or incentives to sue their banks as Arav is, mainly because the court costs would outstrip any profits they would be reclaiming. Nor do they have the time to wait around for regulators to make recommendations as tax penalties accrue. That’s why the Israel Bitcoin Association has taken it upon itself to take these suits to the courtrooms themselves: to give the industry a voice.

Establishing a Much-Needed Precedent

“We’re doing this because we have a statement to make,” Rosenfeld said, speaking to the class action lawsuits that the Israel Bitcoin Association is leading against The Union Bank of Israel (or Bank Igud in Hebrew). The association has also filed a complaint against Mizrachi bank with the Bank of Israel’s Banking Supervision Department and a freedom of information petition with the Bank of Israel to view its member bank’s cryptocurrency policies.

Rosenfeld said that the taxation problems “seem to be getting worse and worse,” as investors are subject to the whims of their banks and variables like transaction history and amount invested. As Rosenfeld simply put it, “There are no clear rules.” 

“We moved forward with the lawsuit because we saw the legislation was getting delayed,” he said. “We would have much preferred the legislation to be final before going to court because the new legislation would help us very much. But we have to do something in the meantime.”

If it wins its class action suits, the Israel Bitcoin Association hopes to establish a clear legal precedent. Bits Of Gold’s lawsuit failed to do so, Rosenfeld clarified, because the exchange struck a compromise with Leumi during the legal battle; because it didn’t “win,” per se, this didn’t create a definitive basis for future cases like it. 

Rosenfeld thinks they have a good shot to establish the much-needed precedent. Even so, it’s not a guaranteed victory, as the situation is thorny and requires deft legal maneuvering. Banks are particularly guarded against money laundering risk, given recent penalties at the hands of U.S. authorities, Rosenfeld said. They’d rather challenge a slew of suits from cryptocurrency investors than have to face the Israeli government in court.

“Two major Israeli banks were charged by U.S. authorities for money laundering that were conducted in the last decade. It’s a very sensitive issue, and it seems like they are trying to avoid stuff that they don’t understand.” 

Tracking Money Laundering on the Blockchain

An inherent irony, however, is not lost on Rosenfeld, who holds that sniffing out money laundering using a transparent and fully-public ledger is easy, so long as the bankers understand how to trace the funds properly. This doesn’t even take into account that most depositors are dealing with “small amounts of money,” nothing nearing the mass sums of dirty money that launderers need to wash.

Indeed, Gidi Bar-Zakay, who spent 17 years as a deputy director for the Israeli Tax Authority, suggests that banks should be rejoicing about the Bitcoin blockchain’s potential to police money laundering, not shying away from it.

“This is a much better tool. I’ve been engaged with black money for years, clearing tax havens. It’s very difficult. With blockchain, it’s a walk in the park,” he told Bitcoin Magazine.

Bar-Zakay left the tax authority in 2009 and launched a career as a consultant. In 2016, his old employer approached him about Bitcoin so that they could learn more about it. He said he was “embarrassed to admit that I knew nothing about it,” but he learned and became enthralled. 

“I didn’t know anything about it. And I loved it. I immediately recognized the potential for this industry and everything we do — and for regulations.”

A Simpler Approach to Crypto Taxation

The tax authority’s commission inspired Bar-Zakay to found Bittax the same year, a tool that allows cryptocurrency investors to easily navigate the labyrinth of tax implications constructed by trading cryptocurrencies. Like the U.S.’s own code, in Israel, each trade is created as a taxable event. 

“You might be paying twice for the same event,” Bar-Zakay said. A service like Bittax could keep investors from unwittingly paying more than they need to (Bittax recently became available to U.S. customers as well).

While Bittax might help investors make sense of the tangle of transactions that the current tax codes scrutinize, Bar-Zakay hopes the tax authority will adopt a simpler and more sensible approach, such as only taxing cryptocurrency users when they cash out to fiat. 

This would be a sensible and far less painstaking approach, he believes. But for it to have any effect, these same investors need to be able to deposit cryptocurrency gains into their bank accounts in the first. Should the legislation fail to pass through the Israeli parliament, investors will have to rely on the lawsuit led by the Israeli Bitcoin Association — assuming it can finally establish the precedent that actions before it have failed to evoke.

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