Israel’s interest in virtual currencies is growing, just as the Bank of Israel is warning of their risks.  This week, the first Bitcoin ATM began operating in the country, while another virtual currency was launched specifically for Israel.

Bitcoin is a virtual, decentralized currency which is traded primarily online.  Its rapid rise in popularity has contributed to its acceptance by a variety of businesses around the world.  It should be noted, however, that the Bitcoin and other virtual cryptocurrencies are not legal tender and therefore no business is required to accept it.  Additionally, it is considered an asset, and not money, for taxation purposes.

Bitcoin emBassy, a non-profit organization dedicated to spreading the use of the cryptocurrency, opened the ATM on Sunday.  The machine works a little differently than typical ATMs in that one deposits cash and one’s virtual wallet is loaded with the equivalent value in Bitcoins.  It is being operated by Bits of Gold, a company which specializes in Bitcoin services for the Israeli market.

Ayal Segev of Bitcoin emBassy said, “I am proud that the embassy has made the first bitcoin vending machine available in Israel.

“This is part of our mission, to make bitcoins accessible to the general public.”

According to the Israel Bitcoin Association, hundreds of Israeli businesses already accept the popular cryptocurrency.  However, this does not impress the founders of Isracoin, a competing cryptocurrency geared specifically towards Israel.

Amnon Dafni, communications director of Isracoin, told the Times of Israel, “The fact is that [Israelis] don’t use this wonderful technology in an application to advance the economy.”  He expressed his belief that Israelis would be drawn to a currency aimed specifically at them.  He added, however, that the company does not intend to limit its services to Israel, and sees an international market for the coin.  He believes it will bolster the Israeli economy through international trade.

The developers of Isracoin expressed their discontent with the Israeli banking system, stating on their website it ”is rife with interest over-charging on credit, low interest on deposits and high fees and charges for no apparent reason. The public has no choice but to endure this, while the cost of living skyrockets.”  They believe Isracoin will help reduce debt and drive down the cost of living precisely because it is not controlled by the Bank of Israel.

Other economic experts are skeptical, however.  Dr. Moshe Cohen, assistant professor of finance and economics at Columbia Business School, said, “There’s a lot of these alternative currencies that are trying to sprout up because it’s an opportunity to appreciate a currency from zero to who knows what,” he said. “The main question [for Isracoin] is what are you offering that Bitcoin isn’t offering and how is your product differentiated.”

The advantage of Bitcoin, Cohen explained, is that it has already established a name and reputation worldwide. “In order to beat that advantage,” he said, “a new currency or a new transfer technology has to offer something really unique that the existing currencies don’t offer,” such as added reliability, or protection from accidental loss, theft and fraud.

“A branding piece is not going to be enough to attract a large enough network,” Cohen said. “They’d have to make a strong case of added value.”

One local Bitcoin user and advocate, Shuky Aharonovich, doubted Isracoin could achieve its stated goal of lowering the cost of living, which he linked primarily to taxes and not to the strength of the shekel.

Virtual currencies are unstable because they have no inherent underlying value.  The Bitcoin began 2013 at a value of $15, skyrocketing to a peak of over $1,150.  On Sunday, when the ATM opened, it was trading at $47.  As well, because they can be transferred, like cash, without the oversight or involvement of an established financial institution, they are susceptible to criminal use, such as money-laundering or terror funding.  Additionally, because of its virtual nature, cryptocurrencies risk being lost with forgotten passwords or stolen by computer hackers.  Due to the inherent risks associated with cryptocurrencies, the Bank of Israel, along with leading financial institutions of many other countries, including the US, EU and Canada, while not banning them, discourage their use.