Israel’s Central Bank Warns on Potential Fraud With Bitcoin

Israel’s central bank and finance ministry issued a warning today against the use of virtual currencies such as Bitcoin, saying they aren’t legal tender and are prone to fraud and misuse.

“Virtual currencies are not issued by a central bank, and are not backed by a central bank which guarantees the nominal value of currency,” the Bank of Israel said today in an e-mailed statement. “They aren’t legal tender in Israel, and therefore there is no requirement to accept them as payment for any asset or service or as repayment of a financial loan.”

Virtual currencies are “fertile ground” for fraudulent activities, prone to high volatility, liable to be exploited for money-laundering and terror financing, and vulnerable to robbery via hacking, according to the statement.

Bitcoin, introduced in 2008, has no central issuing authority and uses a public ledger to verify encrypted transactions. It has gained traction with merchants selling legitimate products but also has been used to facilitate illegal transactions.

“Many of the risks that were mentioned are genuine, and they should be taken into account when using Bitcoin,” the Israeli Bitcoin Association, a local group of the currency’s users, said in a statement on its website. Many of them can be overcome, and Bitcoin’s “tremendous potential” shouldn’t be sacrificed “because of the existing challenges,” it said.

Supporters have embraced Bitcoin as an alternative to currencies vulnerable to sovereign debasement. Governments have been wary: China has banned financial institutions from handling Bitcoin transactions, Russia has said currencies outside the ruble are illegal, and the U.S. Treasury Department said in March that virtual currency businesses may be regulated as money-transmitters.

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