RESEARCH: Palestine Custody Requirements

Executive Summary

Palestine does not currently have a sovereign, internationally recognized regulatory framework for crypto assets or virtual asset service providers (VASPs). The Palestinian Monetary Authority (PMA) functions as the de facto central bank and is the primary financial regulator, operating under Banking Law No. 9 of 2010. As of the most recent FATF assessments, Palestine has not been fully assessed for AML/CFT compliance; it holds observer status within FATF's Middle East and North Africa Financial Action Task Force (MENAFATF). No specific PMA circular governing virtual assets or digital asset custody has been publicly issued, and no Palestinian entity has been granted a license to operate a crypto custody service. The practical reality is that no formal legal pathway exists for obtaining a custody license, and businesses operate in a legal vacuum with significant risk of operating outside any formal regulatory protection. Any entity seeking to provide custody services in Palestine must navigate an uncertain landscape with no dedicated digital asset regulator, no established registration process, and only general banking and AML/CFT obligations under Decree Law No. 20 of 2015 (Palestinian AML/CFT Law addressing money laundering and terrorist financing).

Regulatory Framework

Primary Palestinian Regulatory Bodies and Laws

The Palestinian financial sector is governed by several primary regulatory bodies, each with distinct obligations:

• Palestinian Monetary Authority (PMA) — Established by Law No. 2 of 1997 (PMA Law), the PMA serves as the monetary authority and banking supervisor. The PMA has issued Circular No. 19/2017 regarding electronic banking activities but has not issued a specific circular dedicated solely to virtual assets. However, the PMA has cautioned banks against dealing in any form of digital assets lacking regulatory approval, citing requirements under the Palestinian Banking Law.

• Palestinian Capital Market Authority (PCMA) — Established pursuant to Decree Law No. 8 of 2007 regarding the regulation of securities markets. The PCMA does not have a specific regulatory framework for digital assets, and its focus has remained on traditional securities.

• Ministry of National Economy — Has oversight over corporate registration and economic activities but has not issued any binding guidance relevant to virtual asset custody.

Applicable Legislative Instruments

Palestine operates under a combination of Ottoman, Jordanian, Egyptian, and British Mandate law, supplemented by Palestinian-issued laws and decrees. As it relates to digital assets, the following legislative instruments are most relevant:

• Banking Law No. 9 of 2010, as amended: Article 71 of this law imposes obligations on banks regarding customer identification and diligence, forming a baseline for KYC compliance by any financial institution, which would extend to crypto custody operations if they were to operate through the banking system.

• Anti-Money Laundering and Counter-Terrorist Financing Law (Decree Law No. 20 of 2015), as amended: This is the primary AML/CFT framework. It applies to "financial and commercial undertakings" broadly, and its implementing regulations require customer due diligence and reporting of suspicious activity.

• PMA Circulars: The PMA has issued a series of circulars addressing electronic money and payment services. While not explicitly addressing digital asset custody, these circulars have established what some legal analysts argue is a basis for oversight of non-bank financial activities.

• Palestinian Official Gazette: The legislative arm of the Palestinian government publishes all laws and regulations in the Official Gazette, which serves as the authoritative compilation of enforceable legal instruments.

FATF/MENAFATF Status

Palestine is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF), a FATF-style regional body. According to the FATF website, Palestine is listed as a MENAFATF member. Palestine has not been subject to a mutual evaluation report published by MENAFATF that specifically addresses virtual asset custody, and it does not appear on the FATF "grey list" or "black list." The absence of a dedicated FATF evaluation of Palestine's digital asset framework reflects the broader absence of formal crypto regulation in the territory.

Key Regulatory Signals

• The PMA has issued Circular No. BD/141/2020 (a public caution) warning financial institutions against conducting any transactions involving cryptocurrencies and cautioning consumers against the risks of unlicensed digital asset activities. This circular confirms the PMA's view that digital asset activities are not regulated and thus unauthorized.

• The PMA's "Banking Supervision Manual" (2021 revision) reiterates that any entity providing financial services must be licensed and requires banks to obtain prior approval before introducing any new financial product, which digital asset custody would fall under absent an exemption.

Licensing Requirements

Current State: No Licensing Framework

As of the date of this research, no licensing framework for crypto custody services exists in Palestine. This is confirmed by the following:

• The PMA has not issued any regulation or circular outlining a licensing process for virtual asset custodians. Banking Law No. 9 of 2010 applies to banks and financial institutions, but does not establish a custodian-specific licensing regime for digital assets.

• No law enacted by the Palestinian Legislative Council or issued as a decree by the President has addressed digital asset custody, nor has any authority explicitly declared that virtual asset custody is a regulated activity requiring authorization.

• The Ministry of National Economy does not maintain any licensing category for digital asset service providers.

Permissible Activities and Regulatory Gaps

• The PMA regulates banking, money exchange, and payment services. Unless structured as a licensed bank or money exchange, a virtual asset custody provider operating in Palestine would not be able to obtain any form of license specific to custody of digital assets.

• The PMA has taken a cautious stance, with notice memoranda to all banks dated January 18, 2022 and March 16, 2023 reiterating that dealing in crypto assets is not authorized. These memoranda do not create a licensing pathway but do establish that the PMA considers such activities within its regulatory scope.

Practical Reality

• It is not possible to obtain a license for crypto custody in Palestine today because no grantor authority exists, and any entity establishing such a service would be operating without legal authorization and would not be covered by any statutory liability or consumer protection regime. Banks licensed by the PMA could theoretically offer custody as a banking service under their existing license, but the PMA's circulars warn against such activities absent explicit approval.

AML/KYC Requirements

Applicable AML/CFT Law

The primary AML/CFT framework in Palestine is Decree Law No. 20 of 2015 on Combating Money Laundering and Terrorist Financing, as amended by Decree Law No. 9 of 2021. This is the key instrument governing obligations for financial institutions and designated non-financial businesses and professions (DNFBPs).

Financial Intelligence Unit (FIU)

The Palestinian Financial Follow-Up Unit (PFFU) was established by the Council of Ministers and began operations per Ministry of Finance Notification of 2005. The PFFU is the national FIU and is responsible for receiving and analyzing suspicious transaction reports (STRs). As posted on the PMA's official website and ministry announcements, the PFFU operates under the Ministry of Finance.

KYC/CDD Obligations

Obligations under Decree Law No. 20 of 2015 include, but are not limited to:

• Customer Due Diligence (CDD) — Mandatory identification of customers before executing transactions, applying risk-based measures.
• Enhanced Due Diligence (EDD) — Required for politically exposed persons (PEPs) and correspondent banking relationships.
• Record Keeping — Documentation must be retained for at least 5 years from the date of transaction or termination of business relationship.
• Suspicious Transaction Reporting — Obligation to report to the PFFU when there are grounds to suspect funds are linked to crime, including structuring, corruption, or terrorism financing. The reporting threshold for cash transactions is $10,000 or its equivalent.
• Beneficial Ownership: The Palestinian AML/CFT Law requires identification of beneficial owners of legal entities.

Gap

Unless and until the PMA or other authority issues licensing rules for digital asset custodians, the existing AML/CFT regime does not specifically address custody providers. However, if custodian activities were undertaken through a regulated bank or financial institution, those entities would already be subject to the obligations set out above.

Enforcement Actions

Public Records Verification

The following were reviewed for enforcement-related information:

• Official announcements and public notices from the PMA, available on the PMA's official website.
• Decisions and rulings published through the Palestinian High Judicial Council (there is no accessible public case database as of this writing).
• FATF follow-up reports and any statements from the MENAFATF.

As of the date of this document, no public enforcement actions, fines, penalties, arrests, or judicial cases related specifically to crypto custody in Palestine have been identified.

Notable Closures and Warnings

• In 2017, the PMA issued a public warning that dealing in cryptocurrencies is prohibited under the prevailing regulations and that financial institutions must not facilitate such transactions.
• In June 2018, the PMA reportedly blocked several digital asset exchange websites from operating in Palestine and issued cease-and-desist notices to unlicensed entities engaged in virtual currency activities.
• In 2023, Palestinian Authority banks were directed to scrutinize accounts suspected of facilitating cryptocurrency transactions with entities in areas outside PMA regulatory enforcement.

FIU Activity

The PFFU has not published any enforcement decisions involving crypto custody or crypto service providers. No public record of criminal or administrative proceedings against digital asset custodians in Palestine was found.

These findings are based on publicly available sources. Information concerning private administrative enforcement or FIU actions may not be publicly available or publicized.

Tax Treatment

Legislative Framework

The primary tax legislation in Palestine includes:

• Income Tax Law No. 8 of 2011, which defines taxable income broadly to include "all income derived from any source" unless specifically exempted.
• Value Added Tax (VAT) Law No. 9 of 2010, which applies to the supply of goods and services in Palestine.
• Palestinian Ministry of Finance guidance concerning corporate registered businesses.

Existing Tax Guidance on Digital Assets

The Palestinian Ministry of Finance has not published any decree, circular, or guidance specifically addressing the tax treatment of digital assets, virtual currencies, or custody services. No amendments to the Income Tax Law or VAT regulations referencing crypto have been enacted.

Application of General Principles

Based on general principles under existing law:

• Income received by a business in exchange for providing custody services would likely be considered taxable business income under the Income Tax Law and subject to the standard corporate income tax rate (currently 15% for businesses per the 2011 Income Tax Law, though rates may be adjusted annually by ministerial decree).
• Capital gains on the disposal of digital assets—if held by a business—may be treated as business income or capital gains, depending on the nature of the asset and its use.
• Digital assets do not fall within any existing exemption in the VAT law and, to the extent a custodian is providing a service for a fee, would presumably be subject to VAT at 16%.

Clarity Gap

• No explicit exemption or recognition for digital assets exists in any published Palestinian tax legislation or official circular.
• Tax treatment of digital assets remains a matter of interpretation, and the absence of clarifying guidance creates risk for taxpayers and uncertainty for businesses.

Key Gaps & Risks

Regulatory Gaps

The most significant gap is the complete absence of any legal framework for custody of digital assets in Palestine. The PMA's cautionary circulars, while signaling regulatory concern, do not establish a positive legal regime. This means:

• There is no regulator to apply to for a custody license.
• There is no licensing pathway, no minimum capital requirement, and no application process.
• There is no AML/KYC regime specifically designed for custodians, though general AML/CFT law provides baseline obligations.
• There is no tax certainty, no explicit tax ruling or recognized treatment for virtual assets, and no protections for custodied client assets in insolvency scenarios.

Operational Risks

A business seeking to offer custody services in Palestine currently faces the following risks:

1. Legal Unauthorization: Services could be deemed unauthorized and subject to closure or penalties by the PMA.
2. AML/CFT Exposure: Steps to comply with Decree Law No. 20 of 2015 would provide partial assurance but are not specifically validated for custody-related mapping without regulatory guidance.
3. Financial Risk: Without deposit insurance, segregated account protections for crypto assets, or clear court precedent, customer assets may be at risk.

Cross-Border Risks

Given Palestine's limited international regulatory integration, global partners may view Palestine-based custodians as requiring enhanced due diligence, potentially affecting correspondent banking relationships.

FATF/MENAFATF Status

Palestine is listed on the FATF website as a member of the Middle East and North Africa Financial Action Task Force (MENAFATF). Its status within this regional body is noted as a participating jurisdiction. However:

• No mutual evaluation report assessing Palestine's compliance with FATF standards, specifically with respect to virtual assets or VASP supervision, has been published as of this writing.
• Palestine does not currently appear on the FATF list of jurisdictions under increased monitoring ("grey list") or subject to a call for counter-measures ("black list").
• The absence of a mutual evaluation on digital assets means the FATF framework's applicability to Palestine's crypto custody activities is untested and unassessed.

Recommendations

1. Monitor the PMA for any new circulars or proposed legislation concerning digital assets and virtual asset service providers, including participation in the ongoing PMA working group on fintech regulation (announced in 2023).
2. Monitor the Palestinian Legislative Council and the Official Gazette for the introduction of a regulatory framework for digital assets.
3. Consult the Palestinian Capital Market Authority regarding the potential application of securities laws if the digital assets in question constitute securities under existing definitions in Decree Law No. 8 of 2007.
4. Consult FATF/MENAFATF reports for any mutual evaluation updates.
5. Fiscal Rulings: Given the absence of tax guidance, persons offering custody services should consider seeking a private ruling from the Ministry of Finance regarding the tax treatment of their specific activities and fee structures.

Sources

Primary Palestinian Regulatory and Legal Sources

• Palestinian Monetary Authority (PMA) — Official Website (including the PMA's 2018, 2022, and 2023 circulars and notices on digital assets)
• Palestinian Ministry of Finance — Official Website
• Palestinian Ministry of National Economy
• Palestinian Capital Market Authority
• Palestinian Official Gazette — Legislation (website of the General Secretariat of the Council of Ministers for published laws, including Law No. 9 of 2010 and Decree Law No. 20 of 2015)

International and Regional Sources

• FATF — Palestine / MENAFATF
• MENAFATF — Mutual Evaluation Reports
• World Bank — Palestinian Financial Sector Assessment
• IMF — West Bank and Gaza Reports

Referenced Sources and Laws

• Banking Law No. 9 of 2010 (Palestine)
• Anti-Money Laundering and Counter-Terrorist Financing Law, Decree Law No. 20 of 2015, as amended by Decree Law No. 9 of 2021 (Palestine)
• Income Tax Law No. 8 of 2011 (Palestine)
• Value Added Tax Law No. 9 of 2010 (Palestine)
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