Blockchain 2024 Comparisons

Israel's blockchain and cryptocurrencies space is bustling with innovation and Entrepreneurship, true to the “Start Up Nation” tradition of the country. Israeli companies and entrepreneurs are active in every bracket of the blockchain space. However, Israeli law and regulation have been relatively slow to adopt new laws and supporting regulation, and Israeli banks have also been reluctant to provide services to crypto related endeavors as well as to private customers who are active in the cryptocurrencies arena.

During the past 12 months, significant events impacted Israel's cryptocurrency landscape. Here are some of the major events:

• An updated directive by issues by the Bank of Israel was supposed to ease the relations between crypto holders and banks, but has yet to make a substantial impact.
• The Israeli supreme court ruled that it is not illegal for banks to be sell cryptocurrencies to the public, but called on the legislators to bring more clarity around this issue. It should be mentioned that no bank in Israel has started selling any cryptocurrency to the public, but do offer trade in BTC ETFs.
• As a result of the attach by Hamas on 7 October 2024 and the war that ensued thereafter, the Israeli crypto community came together and raised significant funds in crypto for philanthropic needs. Israeli crypto firms also joined in a significant effort to find and report any terror financing endeavors.
• Bits of Gold, a licensed crypto broker, announced a pilot of an New Israeli Shekel stable coin called BILS, on Solana. 
• The Israeli Tax Authorities published a new protocol in an attempt to facilitate the payment of crypto related taxes in cases where the banks would not accept the funds in order to transfer them to the tax authorities.
• Tectona is the first publicly traded Israeli company (and fifth overall) to receive a crypto services licence from the Israeli Capital Markets Authority.

According to the Israeli Crypto Blockchain and Web3 Companies Forum, there are no less than 174 companies operating in this space, employing approximately 3,800 employees. Companies ranging from crypto investment firms, algo trading firms, technical infrastructure, blockchain related RegTech innovations, cyber security and many other initiatives.

At this stage, Israeli individuals are using cryptocurrencies mostly for investment purposes. Cryptocurrencies, especially stable coins, are also used in some niche markets for payments – especially cross-border payments.

While, as in most jurisdictions, there has not been widespread adoption of blockchain based applications in the Israeli business community, there are many significant initiatives that suggest this may change in the near future. For example: 

• The Tel Aviv Stock Exchange (TASE) has been public about working on a blockchain-based platform for issuing and trading digital securities in collaboration with Fireblocks, which includes tokenised bonds and deposits.
• The Bank of Israel has also widely publicised its exploration and experimentation with infrastructure for a CBDC - the digital Shekel.

NFTs that gained popularity in art and entertainment initiatives in Israel have seen a decline in popularity, but there are numerous initiatives in Israel regarding the use of NFTs in relations to authentication of ownership of tangible assets, intellectual property rights in music, etc. These initiatives are relatively in their embryonic stage and have not gained significant traction in the general business community.

Israeli law has not addressed the issue of when a transfers of digital asset via a blockchain network considered final. In case law regarding blockchain based assets, there have not been significant findings regarding this issue. 

In a report published by the Israel Securities Authority (ISA), it made a distinction between “security tokens”, “utility tokens” and “payment tokens”.

While all type of crypto currencies are subject to AML rules, it is yet unclear where the line falls between the supervision of the ISA – regarding security tokens and what will probably remain in the sole jurisdiction of the Capital Market Authority – utility tokens and payment tokens. In regards to payment tokens, the Bank of Israel (BOI) has published a paper suggesting that it will have the authority to supervise stablecoins that will become a meaningful means of payment in the market.

The ISA is promoting legislation changes to the securities laws that will define “digital assets”, and which digital assets are “digital investment assets” and allows the ISA to give the necessary orders in order to supervise securities that take the form of “digital assets” and “digital investment assets”. So far these changes to the legislation have not been approved.

So far there is no specific law or regulation regarding tokenised securities in Israel. By default, these assets are under the jurisdiction of the ISA. As mentioned above, the ISA is now promoting legislation changes which will allow it to give any necessary order regarding such tokens in order to bring give specific instructions in order to protect the investor’s interests.

In February 2023, the Bank of Israel published a paper titled “Principles for activity of Stable Coins” inviting comments from the public. The paper has no legal binding effect, but it does provide a window into the state of mind of the BOI who is in charge of Israel's currency and payment systems. The paper makes a distinct distinction between stablecoins backed by deposits of fiat currency which it considers stable coins and “algorithmic” stablecoins that use a formula to maintain their peg which it considers to be speculative and are not regarded as stable coins.

The paper also suggests that the issuing of stable coins in Israel should be regulated and overseen by the Capital Market Authority, which regulates and oversees financial services companies that provide crypto related services. However, the paper suggests that if the use of a certain stable coin in Israel will become wide enough, the BOI will be able to declare it as a major payment system and assume the regulation and oversight of such stable coin.

In March of 2024, Bits of Gold, an Israeli licensed crypto broker and custodian, announced the launch of a stable coin pegged to the Israeli shekel called BILS, on the Solana infrastructure in collaboration with QEDIT and Fireblocks. The project is supervised by the Capital Markets Authority that has so far approved a limited pilot within a “sandbox” framework.

No information has been provided in this jurisdiction.

Although no cryptocurrency is considered legal tender, accepting payments in cryptocurrencies is allowed in Israel, and the Israeli Tax Authority issued orders explaining how the accepting party should report such payments – taxes (including VAT) will be paid in shekels. However, due to associated exchange costs, so far payment in crypto is rare.

At this stage, there are no specific regulatory orders relating to the use of digital assets in collateral arrangements in Israel.

At this stage, there are no specific Israeli laws, regulations or binding judicial decisions addressing the legal enforceability of private contractual arrangements made in whole or in part utilising an agreed-upon computer code that executes across multiple “nodes” on a blockchain-based network. Therefore, general principles of contract law will apply.

No information has been provided in this jurisdiction.

In recent years, there have been discussions in Israel surrounding the bill to encourage the development of technology in the financial sector in Israel 2021. This sandbox is intended to serve as a testing ground for fintech companies to trial their models and assess their effects on consumers. The bill proposes the formation of a committee to supervise this programme, provides pathways for companies seeking regulatory approval, and sets forth guidelines for safeguarding potential customers and investors.

Recently, within the established framework, Zioni Pillersdorf Phillip Advocates has actively guided and assisted Bits of Gold through a pilot programme for a stablecoin within a regulatory sandbox environment. This initiative is governed by the Capital Market Authority’s specific guidelines and its ongoing oversight. This engagement showcases our capability to navigate complex regulatory landscapes and positions our clients at the forefront of financial innovation. It presents a significant opportunity to shape the evolving digital currency market and sets a precedent for similar ventures in the sector, potentially influencing future regulatory frameworks and market strategies.

Regarding compliance with global standards in the blockchain sector, Israel actively aligns itself with international norms, particularly those outlined by the Financial Action Task Force. As a member state of the FATF organisation, Israel adheres to its standards. Israel’s dedication to these standards was underscored in the 2022 audit report, earning a commendable “Largely Compliant” rating in emerging technologies, particularly virtual currencies. This achievement reflects Israel’s dedication to combating money laundering and terrorist financing, as evidenced by the amendment of the money laundering prohibition order. Israel’s significant progress in this area underscores its position as a global leader in regulating asset and cryptocurrency activities. This accomplishment is the result of collaborative efforts by various Israeli authorities over the past few years.

In Israel, the regulatory oversight of digital assets is vested in several vital agencies, with the Capital Market, Insurance and Savings Authority playing a pivotal role as an independent financial regulator.

• The Capital Market Authority oversees non-banking financial entities, including insurance companies, pension funds, provident and training funds, and regulated financial services like non-bank credit providers, payment services, money transfers, fintech companies and financial service providers that handle digital assets. As the primary supervisory body for financial service providers, including those dealing in digital assets, the Capital Market Authority adopts a prudent approach to ensure compliance with the licensing requirements stipulated by the Supervision Law. Given the significant failures witnessed in recent years, such as the collapse of Luna Terra, the crypto exchange FTX and the American Israeli company Celsius, the Authority not only maintains a cautious stance but also actively enforces regulations by warning the public against engaging with unlicensed entities that offer financial services involving virtual currencies. This proactive approach aims to safeguard market integrity and protect investors from potential risks associated with the digital asset sector.
• The Bank of Israel, acting as the central bank for the State of Israel, carries out several critical functions including the supervision of Israeli banks, the management of foreign exchange, the maintenance of price stability, and the provision of economic guidance to the government to facilitate various monetary policies. Recently, the Bank has broadened its regulatory oversight to include digital assets utilised for payment purposes. In response, it has crafted specific principles aimed at digital assets primarily employed in payment transactions, and it promotes the adoption of stablecoins within Israel. Given the rapid expansion in digital asset activities and the global setbacks linked to digital currencies, the necessity for stringent regulation and comprehensive oversight of digital asset usage has become increasingly apparent.
• The Israel Tax Authority, operating under the Ministry of Finance, has taken a significant step toward regulating and taxing virtual currency activities. In response to the growing prevalence of virtual currencies, it has developed a procedure that allows individuals to directly remit taxes on profits from digital currency sales to the Tax Authority’s account at the Bank of Israel. This initiative aims to standardise work processes and inspections, making it easier for individuals to transfer tax payments. While regulatory frameworks for virtual currencies in Israel are still in development, this initiative by the tax authority is a notable stride in the right direction.

As digital currencies become more integrated into Israel’s regulation, it is expected that an increasing number of entities will exercise both influence and regulatory control over digital currencies, thus shaping the discourse regarding blockchain and digital assets within Israel.

In Israel, while no official self-regulatory organisations (SROs) exclusively govern blockchain businesses or users, several trade groups and industry associations play significant roles in shaping the landscape for blockchain technology and digital assets. These organisations often work collaboratively with governmental bodies to advocate for favourable policies, provide educational resources and establish best practices for the industry. The Israel Blockchain Association is essential in shaping the blockchain and cryptocurrency sectors. This notable organisation serves as a platform for dialogue with regulators, aiming to influence the regulatory framework, promote innovation and foster the adoption of blockchain technology across various industries while ensuring compliance and integrity. Additionally, it focuses on cryptocurrency-related issues, advocating for users’ rights and influencing public policy to support technological growth and consumer protection. The association is instrumental in creating a supportive ecosystem where blockchain technologies can develop responsibly and transparently, even without specific government-imposed regulatory frameworks. While there may be other smaller or less prominent groups or initiatives, the Israel Blockchain Association stands out as the leading organisation facilitating dialogue between the industry and regulators and advocating for blockchain technology and its integration into various sectors.

As mentioned, in Israel, the government has shown interest in understanding and potentially integrating blockchain technology in various sectors, including financial services, government operations and more. As a result, several initiatives and task forces have been established to investigate the potential benefits and challenges of the technology; among them is the Bank of Israel’s initiative to establish a committee tasked with drafting regulations to oversee currency stability within Israel. The principles detailed in the document are intended to regulate the use of stable currencies in Israel, to ensure that their activities are conducted using risk management measures, and to match consumer protection and stability requirements with this distinct form of currency. Another initiative is the Securities Authority committee established to assess the regulation of decentralised cryptocurrency offerings to the public. This committee examined how the Securities Law 5728 would apply to offers and issuances made to the Israeli public using distributed ledger technology and trading in such assets. The committee’s findings were that (a) a particular disclosure framework should be created for issuers of cryptographic assets, drawing from local or international regulatory experience; (b) establish a “regulatory sandbox” to support experiments in cryptographic asset issuances; and (c) examine a dedicated trading platform for cryptographic assets classified as securities and examine a crowdfunding-like model for such ventures.

Currently, there is no substantial legal litigation process that specifically addresses the interpretation of laws that govern blockchain and digital assets, which could significantly impact the blockchain sector. However, a notable judicial case involves our firm’s petition filed with the Supreme Court on behalf of Bits of Gold and the Israeli Bitcoin Association. This legal challenge was directed against the Bank of Israel’s approval for “Pepper”, the digital branch of Bank Leumi, to offer trading services in virtual currencies. In the petition, we argued that this approval extends beyond the activities permitted under the Banking (Licensing) Law, 5741-1981, and that the Bank of Israel failed to satisfy the conditions for such an expansion. The Supreme Court dismissed the petition, underlining the need for a flexible interpretation of the law to adapt to the changing financial landscape, including incorporating digital currencies.

This decision carries significant consequences. On the one hand, it showcases the adaptability of regulations and laws to innovation and the dynamic nature of financial environments. It empowers banks to provide services in digital assets, even in the absence of explicit legal frameworks. On the other hand, it also highlights the ambiguity surrounding regulating digital assets and the uncertainties prevailing in Israel’s legal landscape regarding blockchain and digital assets.

In Israel, enforcement actions related to blockchain, and cryptocurrency have been instrumental in defining the regulatory perimeter for market participants. The following are the key authorities' activities:

• The Capital Market, Insurance, and Savings Authority - this authority is pivotal in issuing licences to financial service providers, including those handling virtual currencies. By regulating and licensing entities in the digital asset space, the Capital Market Authority ensures that these companies meet strict standards for financial stability, consumer protection and compliance with AML regulations. Their rigorous licensing process helps maintain the integrity of the financial services market, particularly concerning new and emerging technologies like blockchain.
• The Bank of Israel - the Bank of Israel has taken a proactive approach to exploring and potentially regulating stablecoins. The Bank’s involvement is crucial in establishing a regulatory framework for stablecoins, which are increasingly seen as an essential bridge between traditional finance and cryptocurrencies. This involvement includes assessing risks, potential benefits and the overall impact of stablecoins on the financial system and monetary policy.
• The Israel Securities Authority - the Israel Securities Authority has actively monitored Initial Coin Offerings (ICOs), stepping in when tokens are deemed securities offered without proper authorisation. This has emphasised the necessity for entities planning ICOs to comply with securities regulations if their tokens qualify as securities.
• The Israel Tax Authority - the Israel Tax Authority is responsible and focused on ensuring that cryptocurrency transactions are properly reported and taxed, clarifying tax obligations for traders and investors in digital assets.
• The Financial Sanctions Committee According to Prohibition on Money Laundering Law, 5760-2000 - The Financial Sanctions Committee serves a critical role in overseeing enforcement actions pertaining to breaches of the law. However, its mandate extends beyond mere enforcement to encompass scenarios where substantial money laundering risks are identified within financial activities.

A recent case serves as a clear example of enforcement action. The Financial Sanctions Committee, operating under the Money Laundering Prohibition Law, levied a fine of ILS700,000 on IBI Investment House Ltd (IBI). This penalty stemmed from their activities involving the conversion of digital currencies into fiat currencies for clients between 2017 and 2020 and their subsequent deposit into Israeli bank accounts. The committee’s investigation revealed that IBI initiated these practices without implementing adequate policies, procedures and controls to mitigate the significant risks associated with money laundering. Notably, this represents the most substantial sanction imposed under this law on an entity supervised by the Israel Securities Authority recently.

These enforcement measures are not just punitive, but also serve as a guidepost for the future. As the blockchain sector continues to evolve, it is anticipated that further regulatory adjustments and enforcement actions will be necessary to provide continued guidance and oversight. Such measures are not just essential, but imperative for maintaining the integrity and security of financial transactions in this dynamic and rapidly developing landscape.

The Tax Authority regulated the taxation of activities involving virtual currencies in Income Tax Circular 05/2018 on 17 January 2018, titled “Taxation of Activities in Decentralized Payment Methods (referred to as 'Virtual Currencies')”.

The circular stipulates (Section 3.1.2) that the sale of decentralised payment methods (such as Bitcoin) “will be classified as capital income and will be taxed as capital gains”. Thus, the capital gain resulting from the sale of virtual currencies is taxable in Israel, and those engaged in trading virtual currencies must report and pay taxes accordingly.

In many cases, even after the taxpayer has reported income derived from crypto activities, and in more extreme cases, even after signing a tax assessment agreement with the Israeli tax authorities, the taxpayer found themselves at a loss and helpless against Israeli banks which refused to accept money derived from crypto activities, even when presenting the tax assessment agreement, due to the banks’ concerns about money laundering.

Therefore, the Tax Authority published on 23 December 2023, a “Temporary Procedure for Accepting Tax Payments from Profits on the Realization of Decentralized Payment Methods”.

According to the procedure, a virtual currency constitutes an asset as defined in the Income Tax Ordinance. Therefore, profits from the realisation of a virtual currency are subject to capital gains tax and in certain cases, income tax, due to being considered business income. The procedure explains that the current commercial banking system in Israel poses challenges in accepting money originating from virtual currencies due to the difficulty in tracking the source of the funds and concerns about money laundering, and that the banking system’s refusal to accept such funds also applies to tax payments derived from profits on the realisation of virtual currencies.

Therefore, the procedure clarifies that the Tax Authority intends to allow taxpayers who have profited from the realisation of virtual currencies to pay the taxes due from those realisations. The procedure sets the following instructions:

• The taxpayer must prove that the commercial bank refused to accept the tax money in question originating from virtual currencies.
• The taxpayer must detail their activities in virtual currencies, their taxable income, the taxes due, and so forth.

The money deposited in the Tax Authority’s bank account will be deposited in shekels only, and it will be transferred from a foreign bank account, including accounts of a crypto exchange, investment house or other financial service provider operating in a foreign bank.

The taxpayer must provide a declaration that the funds used to purchase the virtual currencies from which the income was derived are legal, that the tax is paid from the income derived from the virtual currencies, and the taxpayer must attach documentation regarding the source of the funds. Additionally, the taxpayer must provide documentation evidencing the “virtual currency path”, ie, the transactions conducted in virtual currencies.

There are no specific ESG/sustainable finance requirements for companies involved in digital assets in Israel.

Israel has extensive laws and regulations regarding privacy and data protection, bringing it in line with other advanced privacy regimes such as the GDPR and the CPAA. At this point in time, there are no specific rules or regulations regarding privacy and data protection for blockchain-based products or services.