Israel’s regulator teases comprehensive crypto framework at ICC

In his monthly crypto tech column, Israeli serial entrepreneur Ariel Shapira covers emerging technologies within the crypto, decentralized finance (DeFi) and blockchain space, as well as their roles in shaping the economy of the 21st century.

While regulation is always a hot topic for the crypto scene, it is always interesting to take a sneak peek behind the curtains and get a sense of how the people writing the rulebook see the state of the game. In late May, Israel’s crypto enthusiasts and entrepreneurs got a chance to do just that as they converged for the annual Israel Crypto Conference, taking place on May 23–25.

Participating on one of its panels was none other than Ilan Gildin, chief economist and strategic adviser at the Israel Securities Authority. Gildin joined other prominent panelists, including Maya Zehavi of a stealth-mode venture fund, and Jonathan Shek of Oz Finance, to share his thoughts on DeFi’s future prospects. That’s where he revealed that a whole array of Israel’s financial authorities had been preparing a comprehensive and holistic regulatory framework for digital assets. The document was coming in the near future, he shared, and the powers that be were looking to foster the growth of Israel’s crypto industry in a responsible and compliant way.

Now, any Israeli will tell you that here, “near future” can mean anywhere between a few weeks and a few years, and the latter is more likely. Still, some in the audience were probably curious to hear about the upcoming rulebook, and Ilan’s acknowledgment that some of crypto’s unique features are indeed valuable. The crypto winter will show which ones those are, he said, as the DeFi space also has its fair share of hot air, too.

Crucially, he also pointed at some of the key concerns that the regulators may take aim at. When code is law, someone has to explain it truthfully to those not in the know, he shared, and also pointed at stablecoins as the “glass ceiling” for the crypto industry — an understandable concern, given Terra’s recent meltdown and the response it produced from the authorities.

We don’t need the Israeli authorities to tell us to do code audits, Maya snapped back, stressing that the industry was taking its own steps toward regulations and good practices. This was indeed the sentiment that I got from many of those attending. As regulators scramble to make their first moves, the industry is already figuring out its own ways and standards, moving at the pace of the business, not the government. Still, even more came out with a different plea: Give us certainty, any kind, the sooner, the better. And they were not wrong.

Related: DeFi: Who, what and how to regulate in a borderless, code-governed world?

Maybe yes, maybe no

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.

The prospect indeed looks quite reasonable. Israel’s blockchain scene is bustling with innovation, so it would only make sense for the country to lead the charge in the field: From adding resiliency to payments infrastructure to helping the government weed out cash in efforts to tackle the shadow economy problem, as the Bank of Israel rightfully noted in its own report. More importantly, though, it would position the nation at the forefront of the digital economy and draw in foreign investment, allowing the country to work as the testing ground for the new financial paradigm.

Related: US central bank digital currency commenters divided on benefits, unified in confusion

According to María Luisa Hayem, El Salvador’s Minister of Economy, who also spoke at ICC 2022, this is exactly what happened with El Salvador after adopting Bitcoin as legal tender. The country had drawn in innovative companies looking to play-test their products with an eye on larger regional expansion, she told the attendees, welcoming them to join in. Israel could do the same for the larger Middle East, showcasing a new-generation economy powered by a strong and resilient blockchain infrastructure. It could even give Israel another common ground to explore with other forward-thinking nations in the region, such as the United Arab Emirates, which is also experimenting with the blockchain, and further advance its regional integration.

Still, the Jewish State is not exactly there at this point, and despite the BoI’s overtures to digital shekel and instructing banks to open to profits from crypto — a real boon to crypto businesses, which used to struggle with their banking — there is a lot of room for progress. And frankly, a regulatory framework indeed sounds like a great starting point, as it would give companies a clear-cut system of coordinates to follow when launching and expanding their operations.

On top of that, an opportunity to run as a fully compliant and regulated entity from Israel without having to seek a license from Gibraltar, Malta or other crypto-friendlier jurisdictions would make life more convenient for businesses. The regulated status does open doors, after all, especially if you are in the business of serving institutional clients, toward whom the crypto scene is growing increasingly friendly.

All in all, Israel, like many other nations, stands a lot to win from opening up to blockchain and crypto assets. So, it’s no surprise that everyone I spoke with at the ICC was looking forward to more government action because certainty, in any shape or form, is the ultimate precondition for that to happen.

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