The digital market of Israel attracts attention with the active participation of regulators in its formation and development. The Israel Securities Authority (ISA) announced the implementation of the blockchain Yael platform, which will ensure the security of the operations and the information exchange with partners. The next step is the introduction of an online voting system to adjust the relationship between investors and the regulator.
And all these changes are taking place against the background of the statement made by the formerly Chairman of ISA, Professor Shmuel Hauser, who at the end of 2017 expressed his concern about the ICO and suspicion that cryptocurrencies could be another bubble. At the same time, the blockchain was declared a promising technology, which is confirmed by the latest actions of regulators.
What is happening with the crypto market of Israel now, how is the regulation carried out and what are the moods and forecasts? All about that - in an interview with Roman GOLD, founding Partner of the Israeli Blockchain Association and managing partner of the JSCapital investment platform.
Attitude to cryptocurrency
BNT: It is known that there were prerequisites for a tougher separation of cryptocurrencies and blockchain technology by the regulators. What is the current mood in the Israeli crypto community?
RG: If to talk about the mood in the market in general, from the regulators side it is even more positive than expected by market participants. In the case of the exchange itself, several steps have been taken to harmonize existing relations. One of the first steps of the exchanges, and it was quite a tough step — the delisting all dummy companies which said they would be engaged in cryptocurrencies, mining and other operations with digital coins, when their quotes soared by several orders of magnitude within a few days.
Today, the capitalization of companies that want to engage in cryptocurrencies and be listed on exchanges should exceed $30 million (100 million shekels). And, of course, they must meet the official requirements.
BNT: How are cryptocurrencies generally regulated in Israel now?
RG: The relation to the actual cryptocurrencies is neutral-positive in general. In fact, since the beginning of this year, when ISA announced new rules for qualifying ICO tokens, there have been no serious advances. With regard to tokens, the recommendations remain the same, they are very similar to the American regulation. Conventionally, there are three cases for public sale. The first type of tokens can be used as a cryptocurrency, that is, to make payments or exchange (for goods or services), but they are not considered to be security tokens. The second type of tokens fixes the right of their owner to a certain product or service, but it does not guarantee any investment prospects. And the third type of tokens provide at least some rights, which are similar to such as stocks or bonds have. And this type is definitely considered to be security tokens.
By the fact, market has now turned in a slightly different direction, and there is a strict control by the regulator for Israeli companies no longer required. And the main reason is that public ICO boom with utility tokens, which could be considered as security tokens in other countries, did not begin in particular.
BNT: How is the taxation on the cryptocurrency market regulated?
RG: If we talk about individuals who make cryptocurrency transactions, they pay VAT, and they also pay the capital gains tax of 25%, as well as for any other profit growth. Because bitcoins and other cryptocurrencies are recognized as property in Israel. But in recent weeks, it was reported that the Israel Tax Authority plans to halve the burden on the owners of cryptocurrencies.
The Israeli Tax Authority released recommendations for the cryptocurrency on February 17, 2018. According to this circular, bitcoin and other cryptocurrencies are considered as assets, which private investors and even miners pay fixed business tax rates on. Individual investors are required to pay capital gains tax of 25% on cryptocurrency trading. And cryptocurrency exchanges are also required to take the VAT fee of 17% of their clients
RG: In general, the relations in the Israeli cryptocurrency market between major players, regulators and government agencies can be considered friendly. There is no confrontation or antagonism. Not only regulators, but also market participants always take part in the working groups. As an example, we can cite the fact when one of the largest Israeli crypto exchangers Bits of Gold voluntarily entered into an agreement with the Tax Authority on notifications of all transactions over $50 thousand that occur on its platform.
BNT: Is there a permanent mechanism for checking the market participants like stock exchanges, traders?
RG: Israeli tax system works more on the beneficiary side. There were cases when people evaded taxes using cryptocurrencies, and there were cases of fraud too, of course. But, as a rule, the impact of the regulator is aimed at the end user and not at the intermediary agents.
BNT: What can you say about the banking system, does it cooperate with cryptocurrency and how does it work?
RG: It is slowly, reluctantly and it is forced by regulators. There were many cases when banks refused to open accounts for companies that operate with cryptocurrency. It got to the point when Leumi bank refused to maintain the account of Bits of Gold, one of the Israeli crypto exchangers. It had to go to court in order to oblige the bank to provide these services.
All banks still are afraid of cryptocurrencies. It took judicial precedent to ensure that each branch of the Bank could serve customers with cryptocurrency. Now the problems are much less, - after the Leumi bank began to work with proven players. But, of course, this is accompanied by a long KYC verification process and account opening. However, there are no formal prohibitions.
In February 2018, the Israeli cryptocurrency exchange Bits of Gold won the case against Leumi Bank, when the Supreme court of Israel made a landmark decision that prohibited banks to cancel crypto-transactions only on the basis of the bank's inability to verify the legality of the company's activities
BNT: After all, it is in the interest of regulators themselves — the cooperation between banks and cryptocurrencies?
RG: Definitely, it is. Because if these transactions do not pass through Israeli banks, they will go either to the jurisdiction of foreign banks or to the gray market at all.
BNT: Since we are talking about the gray market, what is the situation with AML: are such mechanisms needed in these conditions, and how do they work?
RG: Let's just say there is always such a need, but I can't say that with the advent of cryptocurrencies this problem has become more urgent than before. The Israeli Tax Authority has its best practice, and cryptocurrencies are not the heaviest case in terms of transaction tracking. Of course, there is a need to monitor them, track suspicious, but the tax system works in such a way that it covers a person when he tries to spend money obtained illegally.
On the blockchain
BNT: Recently it became known that ISA started using the blockchain platform Yael, which had been developed to ensure the operation security of the regulator. How do you assess this step of regulators in the direction of the blockchain?
RG: There is a successful implementation system of the blockchain in the internal communication system of the ISA, which proves that the technology works on the particular practice cases, rather than earlier theoretical level. There were a lot of experimental pilot projects before for small groups of users in ISA and other Israeli government agencies, including the Bank of Israel and some ministries. But this was the first case, when the blockchain was used not in the pilot mode, but within the framework of national deployment.
The next step is the introduction of the blockchain into the decision-making control system such as the ISA voting system in particular. But most likely it will happen in 2019. Everything will depend on the current indicators of technology implementation: as so Israeli regulators and government agencies consider the blockchain as one of the working tools. The only thing that is a bit confusing in all this dynamics is that all the developments and blockchain expertise in government agencies are made in-house.
The government of Israel has virtually no cooperation with local startups in implementing their developed blockchain technology. At the same time, there are cases when Israeli startups successfully cooperated with foreign government agencies, providing their innovations. For example, the land cadastre of Sweden was transferred to the blockchain thanks to the Israeli startup ChromaWay, and the cryptocurrency of the Marshall Islands was developed by the Israeli team of the Neema startup.
BNT: What do you think is the main feature of Israeli blockchain startups?
RG: The main difference is the ability of the market to self-regulation. We are familiar with different markets where the blockchain ecosystem is booming. For example, Southeast Asia, post-Soviet countries, the USA. In most of these markets, there is a regulator as a batton and a horde of market players, who realized that now you can earn very quickly and a lot of money spending incomparably less energy and resources. This system works like this: the regulator will not catch up, and if it even does this, it will be too late.
In Israel, it practically did not happen. The startup market itself is old: it is the fourth generation of market. The first generation was back in the 80's: these businessmen were the workers of defense structures in past. The second generation was a result of the population inflow from the post-Soviet space, most of whom were people with technical education. The third generation grew up on the dotcom boom and everything connected with that. And the fourth generation is startups that have appeared in the last 7-10 years. The same story happens to investors. The market is so old and cohesive that nobody wants to lose these achievements, money, reputation and unconditional trust level. The gray zone is also there, it has not disappeared at all, but its share against the background of the total startups amount is incomparably small. There is simply no place for scam.In the next part of the interview with Roman Gold we will talk about the dynamics of blockchain startups in Israel: what technologies they are successfully specialized on, what resource do they need most or even have in a deficit.