Crypto Regulations in Israel

Israel’s central bank published draft regulations potentially opening up the country’s financial system to crypto companies by requiring banks to examine the companies individually rather than apply blanket refusals.

• The draft, published on the bank’s official website on Thursday, says banking corporations have to conduct risk assessments and set out policy and procedures for transfers coming from or going into virtual currencies.
• For licensed crypto firms or financial asset service providers, banks will be “required to examine each case on its own and will not be allowed to issue a sweeping refusal to the service provider.”
• Banks will also be required to clarify the source of the money used to purchase crypto, and track the path of movement as virtual currency passes hands “from the time of its purchase until its conversion to fiat currency and deposit into an account with the banking corporation.”
• The draft aligns with anti-money laundering (AML) rules in November. Crypto advocates in Israel told CoinDesk at the time that banks had typically taken an ad hoc approach to accept deposits involving crypto, and they were hopeful new rules would help banks onboard crypto users more easily.
• The proposal is open for comments, after which final guidelines will be formulated.
• Regulators worldwide are ramping up AML regulations and compliance to prevent the use of crypto for money laundering. Lawmakers in the European Union are working to give their new AML authority strict oversight of virtual currencies. Earlier this year, a group of influential financial firms active in the U.S., including Coinbase, Fidelity, and Robinhood, joined together to bring digital assets in step with global AML rules.

Source: Coindesk

A statement issued by the Bank of Israel and several regulatory agencies on February 19, 2014, warned the public against dealing in virtual currencies. The warning laid out the dangers associated with trading in virtual currencies, including fraud, money laundering, and financing of terrorism, among others. In addition, the Bank of Israel said in a January 2018 statement that “it would not recognize virtual currencies such as bitcoin as actual currency and . . . it was difficult to devise regulations to monitor the risks of such activity to the country’s banks and their clients,” according to Reuters.

Source: Freeman Law

“To buy and sell cryptocurrencies in Israel, you need the approval of a financial services provider, for which the Capital Authority is responsible,” Tomer Ravid, owner of an Israeli company that regulates cryptocurrencies, told Al-Monitor. “As far as I know, Binance did not do that, and began marketing itself in Hebrew … Binance, it seems, has not reported to the Capital Authority any unusual actions, so obviously it attracted the attention of authorities. With this in mind, Israeli authorities are now studying the issue more in detail, and are formulating ground rules to better control digital currency trade.’’

Source: Al-Monitor

Israel’s authorities have quite an ambivalent relationship with digital assets. A year ago, the country’s central bank, the Bank of Israel (BoI), was experimenting with a blockchain-based digital shekel based on Ethereum — a private, siloed fork, judging by the reports at the time. The body has a positive outlook for a digital national currency, as it revealed in May 2021, deeming the prospect to be beneficial for the Israeli economy. Later on, in November, Bank of Israel governor Amir Yaron told Reuters the body was stepping up its research efforts into the digital shekel and that the country was looking to spearhead the push into central bank digital currencies.

Source: Cointelegraph

Israel’s Supervision on Financial Services (Regulated Financial Services) Law 5776-2016 requires persons engaging in providing services involving “financial assets” to obtain a license from the Supervisor of Financial Services. The definition of “financial assets” includes “virtual currency.  A license will generally be issued to an Israeli citizen or a resident who has reached the age of majority, is legally competent, and has not been declared bankrupt or, in the case of a corporation, is not required to dissolve. Additional licensing requirements include that the licensee has a minimum specified amount of equity and, if an individual, has not been convicted of an offense that due to its nature makes the licensee unfit to handle financial transactions.

A statement issued by the Bank of Israel and several regulatory agencies on February 19, 2014, warned the public against dealing in virtual currencies. The warning laid out the dangers associated with trading in virtual currencies, including fraud, money laundering, and financing of terrorism, among others. In addition, the Bank of Israel said in a January 2018 statement that “it would not recognize virtual currencies such as bitcoin as actual currency and . . . it was difficult to devise regulations to monitor the risks of such activity to the country’s banks and their clients,” according to Reuters.

Source: Freeman Law

According to ITA Tax Circular 05/2018, foreign-exchange differences arising from changes in currency exchange rates may be exempt from Israeli tax under various sections of the Israeli tax law if certain conditions are met. The word “currency” isn’t defined in the tax law, but it is defined in the Bank of Israel Law 2010 as the New Israeli Shekel. And “foreign currency” is defined in the same law as “bank notes or coins that are legal tender in a foreign country.”

Source: Jpost

Global commerce in cryptocurrency poses regulatory and other challenges for monetary authorities in various countries and friction. In Israel, the Capital Authority — the governmental body responsible for managing the capital market, the exchanges, currency exchanges, and more — recently stopped the trade of the giant international crypto exchange Binance.

The authority, which is responsible for licenses for groups working in crypto, is asking Binance to clarify the types of services it provides for Israelis and the licenses under which it operates. 

According to reports, most groups active in the stock exchange field have applied for a license to operate in Israel by force of a permit to continue trade. By contrast, Binance (a relatively new player in the country) never submitted an application.

Binance is one of the most popular exchanges in Israel, and although it is international, it created platforms in Hebrew targeted at Israelis. It is estimated that 200,000 Israelis have made transactions on its marketplace; its fast interface suits the Israeli fast-track/high-tech modus operandi.

The Capital Authority’s inquiry is meant to check, among other things, whether Binance’s failure to meet Israeli regulations makes it difficult for investors to return funds into the financial system in Israel. 

Source: Al-Monitor

The Israel Securities Authority (ISA) has big plans to regulate the country’s fintech space. As a first step, it is hosting its first-ever fintech hackathon next month.

The ISA is looking to attract blockchain-based solutions that can improve the infrastructure supporting the securities and sovereign debt markets in Israel with the hackathon. The securities regulator has partnered with the Ministry of Finance in Israel, Start-Up Nation Central, as well as tech providers like VMware, Digital Asset, and Algorand to host the onsite hackathon, which will be held on March 24, 2022, in Tel Aviv.

The hackathon will be led by privacy tech provider and World Economic Forum (WEF) Technology Pioneer QEDIT, which plans to help teams discover and bridge gaps in privacy compliance and regulation.

Source: Coindesk

After a three-month court battle by The Times of Israel, together with Britain’s The Financial Times, and separately, the Haaretz newspaper, an Israeli judge has lifted a gag order on two more of ten suspects arrested on November 18 as part of an alleged crypto scam that defrauded victims worldwide of colossal sums of money. Their names are Yaron Shalem and Ido Sadeh Man.

Neither responded to a request for comment from The Times of Israel. Shalem was a vice president at the venture capital firm Singulariteam and until recently the CFO of Celsius Network, a multibillion-dollar cryptocurrency lending platform. Sadeh Man is the founder of the Saga cryptocurrency company.

Source: Times of Israel

On November 14, 2021, an anti-money laundering order regulating transactions in digital currencies went into effect in Israel. According to a commentator the new order “opens the door to granting a permanent operating license to entities dealing in digital currencies.” (Anti-Money Laundering Order (Credit Service Providers’ Duties of Identification, Reporting, and Registration for the Prevention of Money Laundering and Terrorist Financing (AMLO) (Amendment), 5781-2021, § 3(8), amending AMLO 5778-2018.)

The AMLO was issued by the minister of the treasury in accordance with the authority provided in the Prevention of Money Laundering Law, 5760-2000, and the Fight Against Terrorism Law, 5776-2017, and following consultation with the ministers of justice and of public security, under conditions enumerated.

The AMLO defines “a provider of financial services” as “a person who is required to have a license to provide a service regarding financial assets in accordance with the Supervision of Regulated Financial Services Law, except for those who provide ATM services.” Under sections 11 & 12 of the Financial Services Supervision (Regulated Financial Services) Law, 5776-2016, for purpose of a license, a “financial asset” includes “a virtual currency.”According to the law, any act other than extending credit, which is done in the course of practicing a vocation, constitutes either a replacement of one financial asset with another or managing or securing a financial asset requires a license. The law authorizes the minister of the treasury to establish a Supervising Authority in accordance with section 29 of the Prevention of Money Laundering Law for the purpose of managing, processing, and safeguarding security information obtained from reports received under the Prevention of Money Laundering Law and the Fight Against Terrorism Law.

Source: loc.gov

An Israeli inter-ministerial team is recommending the establishment of a regulatory sandbox for fintech startups, intended to provide early-stage companies with regulatory mentoring and time-limited exemptions.

In August 2017, the Israeli Ministry of Finance published a call for information with the intention of lifting local regulatory obstacles. At the time, the ministry cited several similar programs offered or tested in the U.K., U.S., Russia, Australia, and Canada. A similar program was considered for companies interested in initial coin offerings in 2018.

Source: Calcalistech

A newly published legal memorandum aims to enable the creation of a “sandbox”, with inspiration from various programs already implemented in Japan, Australia, and Singapore. The goal is to establish a unique experimental environment, a “regulatory sandbox,” where regulatory relief is granted to companies who choose to participate in the program.

The “sandbox” will be operated by various regulators and will help to adjust regulations for fintech companies while limiting the risks involved. This learning method of trial and error will help both fintech companies and regulators deal with the regulatory challenges that characterize the fintech field in Israel. The ultimate goal is to promote this industry in Israel, improve diversity and competition in the field, and protect the public.

A committee comprised of representatives from Israel’s major financial authorities, including the Supervisor of Banks, the Capital Market, Insurance and Savings Authority Commissioner, and the Israel Securities Authority, will operate the program. The committee will independently select companies operating in the fintech field and the duration of the program will be two years.

Source: Bar Law