Israeli police arrested five people on Nov. 10 on suspicion of laundering roughly 16 million shekels ($5 million) through cryptocurrency trades arranged on a WhatsApp group, in a case that turns on how digital-asset proceeds were slipped into the conventional banking system.

Investigators from the National Unit for Combating Economic Crime inside Lahav 433, the police’s major-crimes division, allege the group ran an unlicensed exchange operation and moved trading profits into ordinary bank accounts by dressing the transfers up as loans. Officers searched the suspects’ homes and seized crypto wallets, computers and tens of thousands of shekels in cash, according to the police account of the case.

The five were questioned on suspicion of…