Israeli securities regulator moves to establish crypto legal framework

After tasking multiple committees over the years, the Israeli Authority is ready for public comment on its proposal of crypto legal framework

The Israeli Securities Authority (ISA) proposes a framework for regulating digital assets as an increasing number of Israeli investors are exposed to digital assets, and over 150 companies operate in Israel, according to the regulator.

The regulator released a proposal in January 2023, outlining its purpose to achieve the “double value” of responding to the risks associated with investing in digital assets alongside giving the authority means to adopt a regulation.

The authority has established multiple committees over the past several years to examine and regulate the issuance of cryptocurrencies and promote the development of digital markets in Israel.

The latest committee was tasked with examining the authority’s policy on investment products in digital assets.

An amendment to the definition of the term “securities” to include “digital assets” used for financial investment was also included in the proposal.

It was further added that the definition of “digital assets” as a digital “representation” of value or rights used for financial investment.

The authority also seeks powers to oversee the digital asset industry, including setting requirements for issuers and intermediaries and imposing sanctions for non-compliance.

The document has opened the communications up for public comment until Feb. 12. It also seeks to establish a requirement for issuers of digital assets to publish a prospectus-like document before the issuance or registration of the assets for trading.

Investor protection is prioritized by requiring intermediaries in the digital asset industry to comply with rules similar to those applied to intermediaries in the traditional securities industry, such as the requirement to hold a license and meet capital adequacy standards.

Areas to address the unique features of digital assets, such as the ability to use smart contracts and the potential for tokens to have multiple functions were also mentioned.

The regulator aims to facilitate the development of the digital asset industry in Israel by allowing for the establishment of digital asset exchanges and enabling the use of digital assets as collateral.

Risks associated with digital assets were also addressed, such as the potential for fraud and market manipulation, by granting the authority the power to intervene in cases of suspected wrongdoing.

This comes after Israel’s chief economist Shira Greenberg laid out a list of recommendations to policymakers on how they should tackle digital asset laws and drive-up crypto adoption.

In a 109-page report submitted to the Minister of Finance at the end of November 2022, Greenberg called for a more comprehensive regulatory framework that would bring trading platforms and crypto issuers in line and give regulators more power to oversee the industry.

<div>Israel's chief economist lays out recommendations for crypto regulation</div>

Bits of Gold

The chief economist said the Supervisor of Financial Service Providers and the Israel Securities Authority should be granted more powers to oversee the industry.

Israel's chief economist has laid out a list of recommendations as to how policymakers should tackle digital asset laws in the country in order to safely drive up crypto adoption.

In a 109-page report submitted to the Minister of Finance on Nov. 28, Shira Greenberg, Chief Economist at the Ministry of Finance, called for a more comprehensive regulatory framework that would bring trading platforms and crypto issuers in line and would expand the powers given to its financial regulators.

Greenberg recommended Israel should improve investor certainty and protection by imposing stricter licensing requirements on trading platforms and issuers of cryptocurrencies, as well as ensuring funds originating from digital assets are more safely managed.

She also recommended the Supervisor of Financial Service Providers have broader powers to oversee licensing rules and develop a more comprehensive taxation framework for the buying and selling of digital assets.

Expanded powers for the Israel Securities Authority were also recommended by Greenberg, who stated the powers were needed in order to ascertain whether a digital asset falls within the scope of Israeli securities laws and to monitor the activity of payment service providers in the crypto space.

In regards to legislation, Greenberg made mention of the need to implement specific licensing and supervision rules for stablecoin issuers, along with a proposed establishment of an inter-ministerial committee to examine and regulate blockchain-based decentralized autonomous organizations (DAOs).

She added it was important that policymakers and lawmakers take into account the concept of technological neutrality when implementing digital asset-related rules.

Minister of Finance Avigdor Lieberman praised Greenberg for her work, stating the report “constitutes the most comprehensive and up-to-date report currently available on this issue for government use” in Israel and that he expects the “report will serve as a basis for future decisions and legislation” on digital asset-related matters in the months to come.

Despite Israel often being referred to as a tech-savvy nation, the country hasn’t shown to be too crypto-obsessed thus far, having ranked 111th out of 146 countries in a recent global crypto adoption index conducted by blockchain data firm Chainalysis.

Greenberg also referenced data in her report that states that Israeli residents have accounted for 21 million blockchain-based transactions in total, which only equates to 0.04% of all crypto transactions worldwide.

Meanwhile, only 2% of Israelis reported owning or using a crypto wallet.

More adoption appears to be on its way. The Tel Aviv Stock Exchange (TASE) recently announced on Oct. 24 that it intends on creating a blockchain-based platform to expand its trading services to cryptocurrencies. In the same month, TASE also kicked off live tests for a pilot project involving the tokenization of digital bonds, which is expected to be completed in Q1 2023.

Government-issued licenses are finally being issued too, with Israeli-based trading platform Bits of Gold becoming the first firm to receive a license from the Capital Markets Authority in Sep. 2022 to store digital currencies through their own secured custody wallet and provide certain digital asset-related services to banks.

Shira Greenberg