In recent years, a rapid increase in the rate of development of the digital assets market has been observed. Digital assets enable opportunities for the growth of the economy, they may serve as a central pillar in the technology of innovative central digital applications, as well as contribute to the promotion of competition and the optimization of payment systems and financial services.
The use of digital assets also entails significant risks, both for consumers and investors in receiving services in this field, and for the economic and financial system. While on the one hand digital assets allow use while maintaining a high level of anonymity, their increasing use and the development of their trading arenas poses risks to the field of privacy protection. In particular, there is a tension between the desire to maintain privacy, and the reporting obligations imposed by law under the prohibition of money laundering and tax laws. Compared to cash, the ability to trace the transactions carried out on digital assets may reveal the patterns of economic activity of the users.
These risks may manifest themselves in a special way within the framework of the adoption of a controlled state currency in which the users are identified and the details of their transactions are exposed to the supervising state body, or within requirements for customer identification and monitoring of the currency route in order to reduce the risks of money laundering. In light of these risks and other risks detailed in the report, proper regulation, enforcement and intelligent risk management are required. The report was written in order to promote the government’s dealing with the risks and opportunities inherent in this field, and to offer recommendations regarding the desired policy approach in Israel.
As part of the consultation process that took place as part of the preparation of the report, the Authority for the Protection of Privacy formulated a position with the aim of helping to manage and reduce the risks to the privacy of immigrants from this field, while realizing the benefits inherent in digital assets. The Authority for the Protection of Privacy recommended the adoption of specific models for offering a digital national currency, and the implementation of privacy-enhancing mechanisms (such as pseudonymous keys, one-time keys, Off-Chain Data Storage and more), which are expected to address some of the risks in the field of privacy.
The Authority for the Protection of Privacy even recommended the adoption of a two-tier model in which there is a division between the central bank and private intermediaries who will provide the consumer with the service in the national digital currency, in order to try and reduce the harm to his privacy. The report covers a wide range of aspects related to the field of digital assets, with the issue of privacy being a significant part of this report. This, from a concept of ‘Privacy By Design’, in which the right to privacy is integrated into policy processes, project design, processes, products or systems.
To read the full report on the website of the Ministry of Finance, click here.