Israel’s Crypto and Blockchain Market: From Regulatory Friction to Regulated Infrastructure

Israel’s crypto and blockchain market has entered a more mature, and more complicated, phase. The story of the past year is no longer only about speculative trading, token prices or the collapse of global platforms. It is increasingly about whether Israel can turn a strong technology base into a functioning regulated market.

For clients looking at Israel, the key development is that crypto is moving from the margins of financial activity towards the regulated financial system. That process is uneven. On one hand, regulators are approving concrete products, the Bank of Israel is deepening its work on digital money and established players are consolidating market positions. On the other hand, companies and users still face practical barriers in banking, taxation and licensing.

The result is a market with real opportunity, but also legal and operational friction. Any business considering activity in Israel should understand both sides: Israel has deep blockchain talent, sophisticated financial regulators and a large local user base, but the regulatory architecture is still being built while the market is already operating.

A regulated shekel stablecoin becomes a reality

The most visible regulatory milestone was the approval granted to Bits of Gold for the launch of BILS, a shekel-pegged stablecoin. This is significant because it moves the Israeli market beyond crypto as an investment product and towards blockchain-based payment and settlement infrastructure. The approval followed a lengthy regulatory process and positions BILS as a regulated shekel-denominated digital token backed on a 1:1 basis.

For the local market, the approval is important for three reasons. First, it creates a supervised model for issuing a shekel-linked token rather than relying only on dollar stablecoins such as USDC or USDT. Secondly, it may help Israeli fintechs and Web3 companies build products that require on-chain shekel liquidity. Thirdly, it gives the Capital Market, Insurance and Savings Authority practical experience in supervising a live stablecoin product, not merely consulting on policy.

This does not mean that Israel now has a complete stablecoin statute. It means that a regulated product has been permitted within an existing supervisory framework. For clients, that distinction matters. A product-level approval can open the door for innovation, but it does not replace the need for broader legislation on reserve assets, redemption rights, custody, disclosure, governance and insolvency treatment.

As discussed further below, the Capital Market, Insurance and Savings Authority is currently working on draft legislation to regulate the stablecoin sector. Although it is not yet known when exactly the draft will be released for public comment, it is reasonable to estimate, cautiously, that this may happen within the coming months.

The Bit2C transaction and market consolidation

A second major development is the proposed acquisition of Bit2C’s activity by a company connected to eToro. Bit2C is one of Israel’s long-standing crypto exchanges. The Asset Purchase Agreement reviewed for this article states that December S.B Ltd is the purchaser, BitTwoC Ltd is the seller, and Bit2C operates a licensed cryptocurrency brokerage and exchange in Israel.

Based on information reportedly provided to the company’s shareholders and later published on social media, the transaction also appears to have the characteristics of a distressed sale. According to these reports, Bit2C lost access, at least temporarily, to two of its wallets. This reportedly created a shortfall in the assets the company was required to hold in order to meet its obligations.

According to the transaction structure as publicly described, the purchaser is expected to cover that shortfall and add approximately 15 bitcoin, while acquiring Bit2C’s entire operating business, including the team that will continue to run the activity. If accurate, these facts suggest that the deal should be understood not only as a consolidation transaction, but also as a rescue mechanism intended to preserve operational continuity and protect customers.

For the Israeli crypto market, this is also a significant development because eToro is a large international group with a proven track record of innovation. Its entry into this transaction may strengthen market confidence, bring additional operational and technological capabilities, and signal that established global players continue to see strategic value in the Israeli crypto sector.

Banking access remains the central bottleneck

Despite regulatory progress, access to ordinary banking services remains one of the most important practical barriers for crypto activity in Israel. The current regulatory framework already recognises that banks should not refuse payment services merely because a transaction is connected to virtual currencies, provided that the relevant virtual currency service provider is licensed and the bank applies a risk-based approach. The Bank of Israel’s public guidance on Proper Conduct of Banking Business Directive 411, Section 87A, reflects this principle.

However, market practice has not fully matched the policy objective. Businesses and individuals still report difficulty depositing funds derived from crypto activity, even where documentation exists. This is why the current work around Section 87A of Directive 411 is important. Based on current market information, the Bank of Israel has been preparing a further amendment, including through round-table discussions with banks and leading crypto companies, co-ordinated with the Israeli Crypto, Blockchain and Web3 Companies Forum.

The amendment has not yet been published for public comment. It should therefore be described as a live regulatory process, not as completed law. If it is published and ultimately adopted, it could become one of the most practically important developments for the industry, because banking access is often the difference between a compliant local business and a business that moves activity abroad.

The industry moves from lobbying to public campaigning

Another development is the public campaign launched by the Israeli Crypto, Blockchain and Web3 Companies Forum to promote a national crypto reform. According to the Forum’s website, its members include major Israeli ecosystem participants such as Fireblocks, Bits of Gold, SSV Networks, Collider VC, Fuse and the Israeli Bitcoin Association. The Forum identifies banking barriers, tax payment difficulties and regulatory gaps as major obstacles for the local industry.

The campaign is notable because it moves the industry from technical discussions with regulators into the broader political arena. Public reports have described the campaign as an attempt to place crypto reform on the agenda ahead of an election year, with claims that a comprehensive reform could contribute jobs and GDP growth over the next decade.

For clients, the political context is relevant. Crypto regulation is no longer treated only as a narrow compliance issue. It is increasingly framed as part of Israel’s competitiveness in technology, fintech and capital markets. This creates opportunities for policy change, but also means that timing may depend on elections, coalition priorities and budgetary legislation.

The State Comptroller puts crypto taxation under the spotlight

The State Comptroller’s November 2024 report on taxation of digital currencies was one of the most important public documents on the Israeli crypto market. The report stated that estimates of the number of digital currency holders in Israel in 2023 ranged from about 0.2 million to 1.67 million, while the potential tax collection from crypto activity was estimated at about ILS2 billion to ILS3 billion. It also noted that only an average of around 500 reports per year were submitted to the Israel Tax Authority between 2018 and 2022, compared with a minimum potential reporting population estimated at around 200,000.

Those figures are important because they show the scale of the gap between market activity and tax administration. The problem is not only taxpayer non-compliance. It is also the difficulty of reporting high-volume trading, wallet transfers, token swaps, staking, airdrops and historical cost bases through systems that were not designed for blockchain activity.

The report also gives policymakers a reason to act. If Israel wants to collect tax efficiently, it needs clearer rules, better digital reporting systems and a more practical path for taxpayers to regularise historical activity. For businesses, the message is straightforward: tax treatment of crypto is no longer a niche issue, and documentation, transaction history and source-of-funds records should be built into operations from the start.

The banking challenge also has a direct effect on the ability to pay taxes in Israel. In practice, this can create absurd situations in which taxpayers want to report income and pay the tax due, but are unable to do so effectively because the banking system is unwilling to accept funds sourced from the sale of digital assets. This disconnect between tax compliance obligations and banking access remains one of the most acute structural problems in the Israeli crypto market.

Voluntary disclosure returns as a practical tool

In August 2025, the Israel Tax Authority announced a new temporary voluntary disclosure procedure, valid until 31 August 2026. The procedure allows taxpayers, subject to conditions, to disclose previously unreported income and assets and receive protection from criminal proceedings in relation to the disclosed matters.

This is particularly relevant for crypto holders. Many Israeli users bought, sold or swapped digital assets over several years without fully understanding the reporting consequences. Some also faced difficulty bringing money into Israel because banks required proof that tax had been paid or that the funds were otherwise compliant.

The Israel Tax Authority’s implementation guidance refers specifically to digital assets. It requires details such as public wallet addresses, relevant bank accounts and year-end balances of digital assets covered by the agreement. This shows that crypto is no longer being handled only through general tax principles, but as a specific compliance category requiring blockchain-specific information.

The digital shekel project gains substance

The Bank of Israel’s work on the digital shekel is not the same thing as private crypto regulation, but it belongs in the same market story. A central bank digital currency would not be decentralised like bitcoin, and it would not be a private stablecoin like BILS. Still, it reflects the same broad shift: money, payments and settlements are becoming more digital, programmable and infrastructure-based.

In March 2025, the Bank of Israel published a preliminary design for the digital shekel system. In May 2026, it published a progress report for 2025, stating that it had continued examining the possible issuance of a central bank digital currency and that work in 2026 would focus on prioritisation, detailed design and an issuance roadmap. The Bank also stated that a recommendation document on whether to issue a digital shekel is expected to be submitted to the governor towards the end of the year.

For clients, the digital shekel matters even before any final issuance decision. It could affect payment service providers, banks, wallet providers, fintech platforms, merchants and government payment systems. It also affects the policy environment around private stablecoins, because a future digital shekel would raise questions about interoperability, competition and the division of roles between central bank money and private digital money.

The government builds a public crypto regulation portal

A quieter but useful development is the creation of a central public information page on crypto-asset regulation in Israel. The Bank of Israel’s page on “Regulation of crypto-assets in Israel” brings together information on banking, licensing, tax reporting, securities supervision and anti-money laundering. It includes references to Section 87A of Directive 411, the requirement for banks to conduct dedicated risk assessments, and the principle that refusal should not be based solely on the virtual-currency character of the activity.

This type of public-facing co-ordination is valuable in a fragmented regulatory system. In Israel, crypto may involve the Capital Market Authority, the Bank of Israel, the Israel Securities Authority, the Israel Tax Authority and anti-money laundering authorities. A single business model can touch all of these bodies at once.

The portal does not solve the legal uncertainty by itself. However, it helps clients understand which regulator is relevant to which part of the activity. It also signals that Israeli regulators are trying to create a more coherent public map of the field.

Licensing reform and the question of foreign players

Another important trend is the expected reform of licensing rules under the Supervision of Financial Services Law. Public reporting in early 2026 described a proposed Amendment 17 that could ease entry for foreign players in crypto and non-bank credit by allowing tailored licences for foreign corporations that are already supervised abroad. The report emphasised that this would not amount to full European-style passporting, but rather an ad hoc licensing model subject to regulator discretion and conditions.

If adopted, this could matter greatly for Israeli consumers and businesses. At present, foreign crypto platforms often face practical and legal uncertainty when serving Israeli users. A tailored licensing path could increase competition while allowing the regulator to impose local standards on reporting, governance, capital, product limits and consumer protection.

Unlike passporting regimes in the European Union, this model does not appear to be based on reciprocity. In other words, Israel may be prepared to ease licensing access for entities from jurisdictions that do not necessarily offer comparable access to Israeli firms seeking to operate there. That distinction is important, because it suggests that the proposed reform is driven primarily by domestic regulatory and market considerations, rather than by a mutual market-access arrangement.

For clients, the key point is that Israel appears to be considering a more flexible model. The country wants access to international financial innovation, but it is unlikely to accept unregulated cross-border activity as the solution. Foreign platforms should therefore monitor this reform closely and prepare for a licensing model that may be more accessible than full local incorporation, but still meaningfully supervised.

Stablecoin legislation is likely to move up the agenda

The BILS approval shows that Israel can approve a supervised stablecoin product under existing tools, but it also highlights the need for a dedicated statutory framework. Public reporting has indicated that the Capital Market Authority intends to promote legislation that would give it licensing, supervision and enforcement powers over stablecoin issuers.

The policy questions are familiar from other jurisdictions. What assets may back a stablecoin? Must reserves be held in segregated accounts? What redemption rights do holders have? Who supervises custodians, technology providers and issuers? What happens if the issuer becomes insolvent?

These questions are not theoretical. A shekel stablecoin could be used in payments, remittances, trading, payroll, tokenised assets and decentralised finance applications. If Israel wants such products to scale beyond pilots, a clear statute will likely be needed.

What this means for clients

The past year shows that Israel is not standing still. The country now has approval for a regulated shekel stablecoin, a major local exchange transaction, renewed tax enforcement attention, a voluntary disclosure infrastructure, ongoing banking reform discussions and serious central bank work on digital money. That is a substantial agenda for a relatively small market.

At the same time, clients should not assume that the path is simple. The most important practical barriers remain first and foremost opening and maintaining bank accounts, but also dealing with multiple regulators and identifying the correct licence for each activity.

The direction of travel is positive for businesses that are willing to operate transparently and invest in compliance. Israel is likely to remain a strong source of blockchain technology, cybersecurity expertise and financial innovation. The opportunity is greatest for companies that can connect that technology base to regulated financial use cases.

Outlook

Israel’s crypto market is moving from improvisation to infrastructure. The main developments of the past year are not only about individual products or transactions. They show a system trying to answer a deeper question: can Israel build a regulated crypto economy without pushing innovation offshore?

The answer is still open. If banking access improves, tax reporting becomes more practical and stablecoin legislation advances, Israel could become a meaningful regulated hub for blockchain-based financial activity. If those reforms stall, Israeli founders and investors may continue building for global markets from outside Israel.