Israel warns public on bitcoin risks, mulls regulation

JERUSALEM Wed Feb 19, 2014 6:17am EST

A mock Bitcoin is displayed on a table in an illustration picture taken in Berlin January 7, 2014. REUTERS/Pawel Kopczynski

A mock Bitcoin is displayed on a table in an illustration picture taken in Berlin January 7, 2014.

Credit: Reuters/Pawel Kopczynski

JERUSALEM (Reuters) - Israel said on Wednesday it was considering regulation of bitcoin and warned citizens that using such decentralized virtual currencies was risky.

As a crypto-currency, bitcoin is passed between two parties digitally and can be traded on exchanges for real-world currencies. Its value fluctuates according to user demand but it is not backed by any government or central bank.

Supporters of bitcoin are drawn to its decentralized platform and say it is here to stay. Detractors call it a bubble and expect it to be forgotten in a year or two.

However, it has proved increasingly popular and governments and regulators around the world have been searching for the best way to respond.

Israel, home to pioneering firms in hi-tech fields such as cryptography, has emerged as a bitcoin hotspot, prompting central bank governor Karnit Flug to convene a meeting this week with other regulators, including those for capital markets, taxes, securities and money laundering and terror financing.

"It was agreed to continue to examine various perspectives related to the use of, and trade in, virtual currencies," the authorities said in a joint statement on Wednesday.

"These perspectives include possible macro effects, their legal standing, their regulation, money laundering and terror financing risks, taxation and consumer protection."

They said the Israeli public should be aware that bitcoin is unsupervised, is not legal tender and presents fertile ground for fraudulent activities. At the same time, such transactions are anonymous and often hard to trace, they added.

CRIMINAL ACTIVITY

"This anonymity is liable to be exploited for criminal activity, including money laundering, financing illegal activities and financing terrorism," the statement said.

"Law enforcement authorities are therefore likely to close trading platforms in virtual currencies which are used for illegitimate activities, by preventing access or use of customers' capital, which would likely be held by those platforms," the statement added.

Other governments have also issued warnings on the use of bitcoin and New York's financial regulator revealed plans this month to govern virtual currency firms in the state in order to protect consumers and combat money laundering.

At least two dozen Israeli startups have popped up in the past year with a view to creating tools that will allow bitcoin to be used in almost any kind of transaction - from buying shoes to issuing company stock.

In recent weeks, bitcoin was hit by attacks from unknown computer hackers that led to problems at two exchanges. They had to temporarily halt withdrawals by customers who stored bitcoins in digital wallets provided by the exchanges.

This week, a bitcoin is worth about $635, down from around the $1,000 mark in late 2013. However, it was worth only about $150 as recently as last September.

(Editing by Gareth Jones)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (2)
joeyschmoey1 wrote:
Any government that says they are going to “regulate” bitcoin has no idea what bitcoin is. You can’t regulate a decentralized currency and shouldn’t. Governments are scared because they see the economic collapse coming and fear bitcoin stealing their power and influence. Which will happen soon.

Feb 19, 2014 8:52am EST  --  Report as abuse
Burns0011 wrote:
Bitcoin is NOT anonymous! Every single transaction, every one, takes place in ‘public’ in the blockchain. People analysing the blockchain have been able to trace Bitcoin transactions to individuals.

What Bitcoin is, is deregulated, decentralized, and uncontrolled by central banking authorities. There is no need to ‘regulate’ there, since the way Bitcoin interfaces with the ‘normal’ economy is through exchanges. Those exchanges are *already* subject to person identification and reporting laws that are on the books.

Feb 19, 2014 1:57pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.