Blockchain 2022 Comparisons

The Israeli blockchain market continues to grow rapidly, utilising strong technological capabilities and new business models. The strength of the Israeli blockchain ecosystem has been demonstrated in the past 12 months, with several significant M&A transactions where global players have purchased Israeli-based technologies in the fields of multiparty computation (MPC), secure digital wallets and fraud detection. Global and Israeli venture funds have also been active in this space, injecting capital into early-stage technologies that further drive innovation.

In our opinion, this trend is likely to continue in the following year, as some of the venture capital investors have large amounts of capital that need to be invested. The Israeli authorities have recognised the need for better clarity in this area, with the Minister of Finance appointing an inter-government taskforce to suggest policy and possible law amendments. There is no timeline for the conclusion of the team’s review or the implementation of any proposed recommendations. However, according to a declaration of the Minister of Finance, the team is expected to finalise its report during 2022, and the implementation of the recommendations is likely to require additional time.

It should be noted that the strength of the Israeli blockchain market has not manifested into major economic endeavours (as opposed to technological ones), mainly due to the relatively small scale of the Israeli market, regulatory uncertainties and the reluctance of the Israeli banking system to collaborate with cryptocurrency businesses.

The following business models have been observed in the last 12 months:

• play-to-earn, whereby tokens are utilised within an in-game environment to incentivise players/consumers to earn tokens, which can in time be traded over exchanges, put into liquidity pools or redeemed via the platform;
• NFT sales, where certain products and services are offered and sold to consumers via the use of blockchain-minted non-fungible tokens (NFTs) for artworks or other utilities, such as concert tickets, chef's special menus, etc;
• tokenised assets – the use of blockchain technology to record rights to certain assets has led businesses to create new financial products, seeking increasing tradability of traditional assets such as arts, music and stocks on chain;
• NFT service providers – see 1.4 Non-fungible Tokens; and
• decentralised liquidity pools – see 1.3 Decentralised Finance Environment.

The use of decentralised finance (DeFi) protocols by Israeli residents is expanding, mainly as investment opportunities, potentially providing better yields than traditional capital market opportunities. Furthermore, with the increasing popularity of DeFi globally, Israelis are now leading initiatives to further improve liquidity pool protocols, decentralised blockchain governance and protocol security.

Israeli regulators have yet to take any position with regard to decentralised platforms.

To the best of our knowledge, there are no DeFi platforms operated by Israeli registered corporations; Israeli entrepreneurs are looking to set up foreign ones.

Similar to the global trends noted in1.1 Evolution of the Blockchain Market, the past year has seen an explosion in the number of NFT projects in Israel, particularly in relation to the size of the country.

While the most immediate use was the minting and offering of NFTs mostly offered via global platforms such as Opensea, there are now several projects aiming to create an Israeli native NFT marketplace that would allow the offering and trading of NFTs locally.

In order to facilitate the growing need for the development of NFT projects, several companies have started to provide services such as minting, auditing, marketing and managing NFT sale processes for clients who have developed NFT collections.

In addition, many entities from various fields are exploring the possibility of issuing NFTs, including non-profit organisations (eg, universities).

The State of Israel has neither adopted a specific regulatory regime applicable to market participants using blockchain technology or cryptocurrencies, nor “retrofitted” one or more existing regulatory regimes to apply to market participants using blockchain technology or cryptocurrencies.

There are regulatory requirements applicable to certain types of cryptocurrencies (eg, security tokens) and to certain types of activities and services (eg, custody services), but no such requirement is applicable to all market participants. Furthermore, the regulatory regime is not dependent on the business model of the participant but is affected by the classification of the cryptocurrency and the type of activity and services provided by the participant.

It should be noted that the Minister of Finance recently appointed an inter-government taskforce to consider a general policy and regulatory regime applicable to cryptocurrency and blockchain. There is no timeline for the conclusion of the team’s review or the implementation of any proposed recommendations.

Israeli financial institutions (including banks, insurance companies, pension funds, exchange members, credit providers, providers of services in financial assets, lawyers and CPAs) are subject to certain AML/CFT requirements and are required to implement a risk-based approach.

In this regard, although the standards of international bodies such as the Financial Action Task Force or the Bank for International Settlements have no direct application in Israel, they have been incorporated into regulation by the legislators and regulators. Such standards have also been implemented as guidelines/advisory material.

The AML/CFT order applicable to providers of services in financial assets relating to cryptocurrency imposes certain requirements relating specifically to cryptocurrencies (eg, to keep a record of the IP address and public keys used by customers).

The following regulatory bodies are most relevant to businesses or individuals using blockchain in Israel.

Securities Authority

The Israeli Securities Authority is relevant to the following activities:

• public offerings of security tokens;
• public offerings of derivatives of crypto-assets or structured financial products;
• the operation of an exchange that allows the trading of security tokens or derivatives;
• the operation of a trading platform (a platform in which the operator is the counterparty to the transactions) that allows the trading of security tokens or derivatives;
• portfolio management (discretionary) relating to security tokens or derivatives;
• investment advice or marketing relating to security tokens or derivatives; and
• the operation of joint investment arrangement (funds) relating to security tokens of derivatives.

Please note that certain exemptions may be applicable to some of the above activities (eg, the offering of securities and derivatives or the provision of certain services to qualified/accredited investors).

Capital Markets Authority

The Israeli Capital Markets Authority is relevant to the following activities:

• the provision of credit services as a business (including credit relating to cryptocurrencies or credit in cryptocurrency); and
• the provision of services in financial assets as a business, with respect to crypto-assets.

Bank of Israel

In general, cryptocurrency businesses are not directly regulated by the Bank of Israel (assuming that such businesses are not classified as banking activities – ie, the provision of credit and the acceptance of deposits, at the same time). Nonetheless, the directives of the Bank of Israel to the banks affect the banks' policy towards providing services to businesses dealing with cryptocurrencies.

Tax Authority

Cryptocurrency businesses may be subject to taxation, including income tax, capital gains tax and VAT, and to tax withholding.

There are no self-regulatory organisations or trade groups that perform regulatory or quasi-regulatory roles with respect to businesses or individuals using blockchain in Israel.

The following judicial decisions have played a role in interpreting (or establishing) the legal regime applicable to the use of blockchain in Israel.

• Bits of Gold v Bank Leumi: there have been several judicial decisions regarding the reluctance of an Israeli bank to operate a bank account for Israel’s largest cryptocurrency change services (off-ramp). In these decisions, the court ruled that a bank can deny banking services only if there are reasonable grounds to believe there is an AML/CFT risk, and must establish the basis for such reasonable ground. After several court decisions and under the guidance of the Supreme Court, the parties reached a settlement that allowed Bits of Gold to continue its operation.
• Israminers Ltd. v Union Bank; Simon v Bank Hapoalim; Roy Arev v Mercantile Discount Bank: in a series of decisions, the district court ruled that banks need to allow account holders to deposits profits from mining or personal dealings in cryptocurrency when there is no specific AML concern.
• Bar Mittleman v Bank Hapoalim; Shalev Shwartz v Israel Discount Bank; Nir Dagan v Union Bank: in a series of decisions, the courts denied the applications of a cryptocurrency dealer against the closure of its bank accounts due to the concealment of its business from the bank and the lack of a proper licence.
• Noam Kopel v Tax Authority: the court accepted the Tax Authority's classification of cryptocurrency as a “digital asset” and rejected the claim that it is a foreign currency.

No enforcement actions regarding blockchain/cryptocurrency activity in Israel have been published, except for actions by the Tax Authority regarding the evasion of tax payment and reporting.

The Securities Authority has issued a pre-ruling decision that guided market participants to better understand the regulatory perimeter regarding the classification of utility tokens and security tokens.

In 2018 and 2019, the Israeli Securities Authority published circulars regarding virtual currency, in which it notified its intention to allow a regulatory sandbox for blockchain-based projects. The proposed sandbox was supposed to allow the issuance and trade of tokens that may be classified as security tokens, subject to reporting and certain risk-mitigation steps, which should have been agreed upon on a case-by-case basis. The sandbox that aspired to unify all relevant regulators has yet to be launched.

In June 2020, the government published a draft law for the promotion of the development of fintech, according to which start-up companies in the fintech field, including in blockchain projects, will be able to act within a regulatory sandbox, regulated by the most relevant regulatory authority. Such leading regulatory authority would also act as a single point of contact for such start-up company, and will obtain the authorisation of other regulatory authorities. The legislation process for the draft law has not yet commenced.

In 2018, the tax authority issued a circular relating to the taxation of cryptocurrencies, which stated the following.

• Cryptocurrencies are classified as “digital assets” and are subject to taxation. Cryptocurrencies are not classified as a “currency”, so changes in their exchange rate are not exempt from taxation (as opposed to FIAT currency).
• Cryptocurrency may be classified as either a security token, a utility token or a decentralised means of payment. Please note that the 2018 circular did not relate to NFTs or stablecoins, although such types of tokens are likely to be taxed as digital assets or as securities.
• Income from the sale of cryptocurrency by investors who are not engaged in cryptocurrency as a business is subject to capital gains tax.
• Income from the sale of cryptocurrency by investors who are engaged in cryptocurrency as a business is subject to income tax and VAT.
• Income from the issuance of cryptocurrency that is not classified as security is subject to income tax and VAT, with certain rules regarding the timing of such tax liabilities and the deduction of expenses.
• Payment with cryptocurrency for the purchase of assets or services is considered a “barter” transaction, in which the payer (in cryptocurrency) is regarded as the seller of such cryptocurrency and may be subject to tax due to such sale.
• The reporting of cryptocurrency transactions should be done on a per-transaction basis, but in practice many investors report on an annual or bi-annual basis.       

The Minister of Finance recently formed a team to review the policies and regulations applicable to the use of blockchain in Israel. The committee will look into the benefits, risks and challenges posed by the use of blockchain, and is supposed to publish its recommendation in the course of 2022. The implementation of certain recommendations may require legislation procedures.

In 2018, the Israeli Securities Authority and the Tax Authority each established a (separate) team to examine matters relating to virtual currencies. Each authority published a report detailing the conclusions of the teams.

Furthermore, in 2018 the Bank of Israel established a team to examine the benefits of the Bank of Israel issuing a centralised digital currency. The team concluded that the benefits of issuing such digital currency were still limited and did not justify such act. Nonetheless, the Bank of Israel did start a “pilot” test of issuing a digital shekel.

Israeli law (including case law) has not yet addressed the question of ownership of a digital asset whose transfer is determined based on an instruction given to a blockchain network using a private cryptographic key. The transfer of ownership in assets that are not real estate is based on contractual consent, which allows flexibility for the trading parties.

Ownership is usually regarded as the ability to control an asset, the right to profit from an increase in its value and the bearing of risk from any decrease in its value.

In the absence of case law, it is assumed that the use of blockchain systems and the sale or purchase of digital assets through such systems constitute consent to the protocol of such systems, including to the manner in which a transfer of ownership is determined and recorded.

In accordance with this, it is assumed that the transfer of digital assets via a blockchain network is considered final when such transfer is deemed final according to the protocol of the specific blockchain network.

Two separate teams formed in 2018 by the Securities Authority and the Tax Authority issued reports addressing the following three categories of digital assets.

• Security tokens: tokens are classified as security tokens if they and the manner in which they are distributed conform to the ordinary test for “security”. The test is based on the US “Howey” case and focuses, in a nutshell, on the expectation of the purchaser to profit and gain yield through and based on the efforts of others.
• Utility tokens: tokens are classified as utility tokens whenthey are not classified as security tokens, or when they allow the purchase of services or products from the issuer thereof. In order to qualify as utility tokens, it is necessary to check various matters, including:
1. the purpose of the purchase of the tokens by the purchasers thereof (investment or utility);
2. the level of functionality of the tokens at the time of their sale; and
3. the representations and undertakings of the issuer, including promises for yield and for the creation of a secondary market.
• Currency tokens: tokens issued on a decentralised network, where the tokens and the issuance thereof are not controlled by any specific person/entity.
• Stablecoins: see 3.3 Stablecoins.
• NFTs: there is no regulatory determination regarding the classification of NFTs, although they are mentioned in the final report of the Securities Authority. It is assumed that the nature of each NFT will be examined in accordance with the above-mentioned classifications.
• Asset-backed tokens: there is no regulatory determination as to the classification of tokens that represent a partial right in assets or a pool of assets. It is assumed that such tokens will be examined on a case-by-case basis and are likely to be classified as securities. In some cases, the tokenisation of assets may be regarded as a technical matter, which does not change the nature of the base asset, but in other cases the tokenised asset may be regarded as security.

Stablecoins (ie, digital assets whose value is intended to be pegged to a second asset) were referred to in the 2019 report of the Securities Authority but there was no determination of how such tokens will be classified. Technically, stablecoins might be classified as securities (ie, debentures) as the issuer thereof is obliged to pay a predefined amount for each token. They might also be classified as derivatives, as their value is linked to the value of another asset (a foreign currency). Moreover, it is possible that the issuance and operation of a stablecoin network will fall under the definition of banking services.

Nonetheless, the classification of stablecoins is still pending determination by the Securities Authority or other legislation and regulation, and it is possible that they will be classified in a different manner given their inherent features of no yield and presumably low risk. It is also likely that the classification will defer between fully backed stablecoins and partially backed ones, including “algorithmic” stablecoins that use a formula to maintain their peg. While it is possible that fully backed stablecoins will be exempt from the definition of securities or banking, it is less likely that regulations will exempt stablecoins that are not fully backed.

There is no legal impediment to using cryptocurrency in Israel.

Banks are reluctant to allow fiat payments when such payments are the result of cryptocurrency transactions, due to AML/CFT risks and the lack of clear regulatory guidance in this matter. Therefore, people who trade with cryptocurrency are likely to have material difficulties when attempting to deposit the proceeds from such trades into the banking system.

There is no regulatory determination regarding the classification of NFTs, although they are mentioned in the final report of the Securities Authority. It is assumed that the nature of each NFT will be examined on a case by-case-basis, using the same tests implemented for examining security tokens (the “Howey” test – see 3.2 Categorisation).

NFTs that conform with the criteria for securities – including NFTs that include representations or undertakings of the issuer thereof which lead to the conclusion that the purchasers thereof are buying them with an expectation of yield from the efforts of others – might be classified as security tokens, and the offering and sale thereof will be subject to regulations. Other types of NFTs might be exempt from regulatory supervision.

There are several veteran service providers in Israel allowing the buying and selling of a few major cryptocurrencies (BTC, ETH), which are not considered securities, in exchange for the local currency, the Israeli shekel.

These platforms have obtained provisional permits to operate pursuant to the Supervision of Financial Services (Regulated Financial Services) Law, 2016, and are awaiting permanent licences.

As far as is known, no new crypto custodial licences have been given so far under the financial services law, but a recent regulatory statement indicates that decisions will be made in the course of 2022.

No foreign crypto-exchange (on-ramp) has obtained a licence to operate in Israel. However, in general, there is no restriction on Israelis opening accounts with foreign exchanges, and some exchanges have even run advertisement campaigns targeting Israelis, much to the dismay of Israeli regulators. International services are generally open to Israeli players, provided that no solicitation is done by such service providers in Israel.

Decentralised exchanges and digital asset securities markets are not set up in Israel, but there are no restrictions on Israelis trading on them.

Only a few cryptocurrency exchange services currently operate in Israel. There are two major players, each employing a different scheme:

• one operates an exchange service, in which the operator exchanges crypto-to-fiat and fiat-to-crypto; and
• the other operates a change service, that allows users to exchange crypto-to-fiat and fiat-to-crypto.

Both operators are regulated and adopt AML/CFT procedures.

From the legal perspective, pursuant to the Supervision of Financial Services (Regulated Financial Services) Law, 2016, any exchange between various types of “financial assets” is subject to a licence requirement and to AML/CFT duties. “Financial assets” include both fiat and cryptocurrency, so the same regulations apply to crypto-to-fiat, fiat-to-crypto, crypto-to-crypto and fiat-to-fiat exchanges. Some additional AML requirements apply to any transaction in which at least one of the currencies is a cryptocurrency (eg, a record of the public address and the IP address of the relevant parties must be kept).

Pursuant to the Supervision of Financial Services (Regulated Financial Services) Law, 2016 and the Prevention of Money Laundering Order (Identification, Reporting an Record Keeping Duties of Providers of Services in Financial Assets and Credit Service Providers for the Prevention of Money Laundering and Terror Financing), 2018, any entity that provides services for the holding, safe-keeping, management, transfer or exchange of financial assets is subject to licence requirements and to AML/CFT duties, including KYC duties.

“Financial assets” include both fiat and cryptocurrency.

In a nutshell, regulated service providers are required to:

• check and verify the identity of their customers;
• obtain identification documents;
• perform a KYC process;
• report large or out-of-the-ordinary transactions; and
• maintain records and documents.

There is a partial exemption for “casual customers”, provided that the volume of their transaction does not exceed ILS50,000 (approximately USD15,000) per six months.

Markets for digital assets are regulated according to the classification of each digital asset. Digital assets classified as securities or derivatives are regulated by the Israeli Securities Authority, including with respect to the offering and issuance thereof, advice on or portfolio management thereof and the operation of exchanges or trading platforms in which such assets are traded. As part of such regulatory supervision, the Securities Authority is authorised to address fraudulent or manipulative practices in the markets for such digital assets.

With respect to digital assets that are not classified as securities or derivatives, the Capital Market Authority regulates any entity that operates a market if such operation includes the holding, safe-keeping, management, transfer or exchange of digital assets. The Capital Market Authority also regulates credit service providers, including with respect to cryptocurrency.

There have been no notable enforcement actions in Israel to date.

The Minister of Finance has formed a committee for the review of Israel’s policies regarding digital assets, and it is possible that such committee will recommend a change in the regulatory structure.

With respect to fiat currency, a banking licence is required in order to accept deposits (from 30 persons or more) and provide credit at the same time, including the re-hypothecation of funds held by the lender. Nonetheless, cryptocurrency is not considered as “currency” so it is assumed that such licence requirement does not apply to the re-hypothecation of digital assets.

Therefore, the right of a digital asset exchange to re-hypothecate (on-transfer) the digital assets they hold for customers to third parties is dependent on the contractual agreement between the exchange and its customers.

Pursuant to the Supervision of Financial Services (Regulated Financial Services) Law, 2016, any services that include the holding or safe-keeping of “financial assets” (including fiat or cryptocurrency) are subject to a licence requirement and regulatory supervision. With respect to crypto-assets, the question of whether a person “holds” a digital asset may not always be clear. In a nutshell, the control over the private keys required to perform transactions in a digital asset would usually constitute the “holding” thereof, although the use of multiple keys or technology such as MPC may affect the analysis.

The mere provision of a technology solution for keeping private keys and the use thereof would not require a licence pursuant to Israeli law, but if the provision of wallet services includes the control of the service provider over the private keys in a manner that enables the service provider to use the keys, is likely to be considered “holding” of the digital assets and will subjugate the provider to regulatory requirements.

Usually, offline (“cold”) wallet solutions do not give the provider any access to the keys stored in the wallet and would therefore not trigger regulatory requirements. As for online (“hot”) wallets, the applicability of regulatory supervision depends on the manner in which the wallet works and the accessibility of the keys to the operator.

Fundraising through the creation and sale of tokens that are intended to be used as part of a decentralised network may be subject to regulatory requirements, depending on the classification of the tokens.

When the tokens issued in such fundraising are classified as securities, the fundraising is subject to a permit from the Securities Authority and to the submission of a prospectus. Please note that there are certain exemptions (which are not unique to tokens), including the ability to perform a limited issuance in the form of a crowdfunding programme, through a licensed “offering management”.

If the tokens issued in such fundraising are classified as utility tokens, the fundraising is not subject to regulatory requirements, other than contractual obligations relating to proper disclosure.

The classification of tokens as security tokens is done through utilising the test developed in view of the US “Howey” case. According to the circular of the Securities Authority, the indications relevant to the classification of security tokens include (among other things):

• the purpose of the purchase of the tokens by the purchasers thereof (investment or utility);
• the level of functionality of the tokens at the time of their sale; and
• the representations and undertakings of the issuer, including promises for yield and for the creation of a secondary market.

Certain activities are not necessarily regarded as activities performed in Israel, for the purpose of applying Israeli regulations. Among other things, the participation of Israeli residents in a fundraising that is not operated in Israel and was not promoted in Israel nor targeted Israeli residents might be regarded as an offering that is not subject to Israeli regulations.

See 5.1 Initial Coin Offerings. The fact that an exchange acts as an intermediary does not change the regulatory requirements.

Distributions of tokens to community members utilising a particular protocol via an airdrop or similar mechanism that does not involve the provision of consideration for the purchase of the token are not subject to regulatory requirements pursuant to Israeli law. Nonetheless, for this purpose, consideration is not limited to monetary payment and may also include other forms of consideration, including active marketing of the tokens. Therefore, before applying an airdrop or similar mechanism, it is important to check whether the participants are required to provide services (or pay valuable consideration) in exchange for the transfer of the tokens.

Pursuant to the Joint Investment Trust Law, 1994, any arrangement for a joint investment through a trustee is subject to licence requirements if the investment is related to securities or derivatives. Accordingly, joint investment in digital assets that are classified as securities or derivatives are subject to such licence requirements.

Please note that there is an exemption for funds that are limited to 50 (non-qualified) investors plus any number of qualified (accredited) investors. Nonetheless, if the participation interests in such fund are classified as securities, any public offering of such funds is also subject to permit requirements pursuant to the Securities Law, 1968 (with the exception of offerings directed to up to 35 non-qualified investors per any 12-month period).

In 2020, the government published a draft of the Broker Dealer Law, which is designated to regulate the activities of brokers and dealers, but the legislation process of such law has not yet commenced.

To date, the activity of brokers and dealers is only partially regulated, including the following:

• activities that involve providing investment advice, marketing investments or providing discretionary portfolio management are subject to licence requirements pursuant to the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995; and
• the offering in Israel to non-qualified investors of securities that are traded in foreign exchanges is not allowed, except for certain exceptions, one of which relates to offerings by Israeli banks or Tel Aviv Stock Exchange members. There is also an exemption pursuant to a general permit of the Securities Authority applicable to:
1. brokers and dealers licensed under US law;
2. credit institutions authorised to provide investment services under the EU’s Markets in Financial Instruments Directive (MiFID); or
3. investment firms or credit institutions located in the UK that are authorised and supervised under the UK’s Financial Services and Markets Act 2000 and Regulation No 600/2014.

To date, there are no laws, regulations or binding judicial decisions addressing the legal enforceability of private contractual arrangements made in whole or in part utilising agreed-upon computer code that executes across multiple “nodes” on a blockchain-based network. The definition of a “contract” under Israeli law does not require a written document or physical signing, except in very specific cases (eg, real estate, undertaking to grant a gift). Therefore, a contractual arrangement utilising computer code should be enforceable, subject to proving the content of such contract and the consent of the parties thereto.

Please note that the Contracts Law (General Part), 1973, provides that an illegal contract is void. Therefore, an agreement seeking to achieve a criminally forbidden goal is likely to be void. Accordingly, a private contractual arrangement aimed at the evasion of tax or the bypassing of securities regulations may be declared void.

The mere development of blockchain-based networks or the code that runs on these networks (as opposed to the operation thereof or the promotion or marketing of such networks) is unlikely to create a fiduciary duty.

Such developers may sometimes be liable for negligence or breach of contract if the development materially deviated from their contractual obligations (including in any white-paper or other publications made by the developers) or from reasonable professional standards of developers.

Liability for fraud may exist regardless of the existence of any fiduciary duty.

The operation of P2P lending platforms in Israel requires a licence pursuant to the Supervision of Financial Services (Regulated Financial Services) Law, 2016. This licence requirement is applicable regardless to the use of fiat or cryptocurrency.

Lending that is done as a business occupation requires a credit services licence pursuant to the above law. Such requirement applies to any type of lending, whether in fiat or cryptocurrency. When the operator is duly licensed, the lenders using the platform are exempt from such licence requirements.

The operation of any service that includes the holding, safe-keeping, transfer or conversion of “financial assets” requires a licence for services in financial assets pursuant to the above law. “Financial assets” includes both fiat and cryptocurrency.

The Pledge Law, 1967, allows the creation of a security interest over any type of assets or rights, subject to registration at the Registrar of Pledges. While such registration effectively creates a legal security interest, it does not practically prevent the transfer of digital assets, and the enforcement of such pledge may be practically difficult. Therefore, for practical reasons it is advisable to keep the pledged digital assets with a custodian.

Please note that a floating charge (a charge over a changing pool of assets) is only allowed for corporations; a security interest over a changing pool of assets by an individual may not be enforceable.

There is no legal requirement for digital assets to be transferred to or kept with a custodian; the use of custodians is voluntary. Institutional investors investing customers’ monies are required to keep the assets in custody, regardless of whether such assets are securities or crypto-assets.

The provision of services that include the holding or safe-keeping of crypto-assets requires a licence pursuant to the Supervision of Financial Services (Regulated Financial Services) Law, 2016. Furthermore, custodians are subject to AML/CFT duties, including the identification of their non-casual customers, monitoring of transactions, reporting and record-keeping.

It should be noted that, with crypto-assets, the question of whether a person “holds” a digital asset may not always be clear. In a nut shell, the control over the private keys required for performing transactions in a digital assets would constitute the “holding” thereof, although the use of multiple keys or technology such as MPC may affect the analysis.

The Protection of Privacy Law, 1981 provides protection for individuals’ privacy. Among other things, it prohibits the use of information without the consent of the subject thereof. The right to privacy is also included in the Basic Law: Human Dignity and Liberty.

The consent of a data subject can be attained through an agreement, including by digital means. Certain types of uses require specific and express consent (“opt-in”), while the consent required for other uses may be attained as part of the terms of an agreement/terms of use/privacy policy or “opt out” mechanism.

The Protection of Privacy Law, 1981 further requires any person managing or holding databases that store sensitive information regarding individuals to register such database and follow certain duties, including data security duties. Any individual whose information is kept in such database may require the disclosure of such information, the amendment of incorrect information and the deletion of such information. Such rights are subject to certain exemptions. Databases that hold no personal identifiable information may be exempt from many requirements, provided that the information cannot be easily reverse-engineered in order to identify the subject thereof.

There are no guidelines or case law regarding the implementation of these rules and duties with respect to blockchain-based products or services. Due to the fact that blockchain systems do not usually include any personally identifiable information, it is likely that such systems will be exempt from many of the requirements.

Data protection regulation applies to any database that is subject to a registration duty, including any database that includes information about 10,000 individuals or more, or that contains sensitive information about individuals.

Due to the fact that blockchain-based products or services do not often contain any personal identifiable information, it may be argued that they are not subject to registration duty; however, a registration duty is likely to apply due to the fact that the identity of the holders of public addresses is sometimes recorded and the fact that many blockchain products and services include information about more than 10,000 data subjects.

The Protection of Privacy (Data Security) Regulations, 2007, define three level of security requirements. Blockchain-based products and services that are subject to registration requirements are likely to be regarded as medium-security, due to the fact that they contain information regarding data subjects’ assets.

The “mining” of cryptocurrencies by running computers that iteratively run calculations in order to validate transactions on a blockchain network that uses a “proof of work” consensus protocol in exchange for tokens is allowed in Israel.

Currently, there are no regulations applicable to this activity, except for duties relating to tax reporting and payments.

The “staking” of tokens to secure a blockchain-based network using a “proof of stake” consensus protocol is not regulated in Israel.

Although there are no known Israeli registered companies providing “staking as a service”, staking is offered to Israeli residents through foreign platforms (and also via DeFi). Due to the fact that staking is done by using a smart contract that holds the user’s token, staking is not regarded as custody services and therefore is most likely not subject to the regulations applicable to custody services.

Whether staking may be considered lending services under Israeli law should be further reviewed. On the one hand, the use of tokens for staking does not allow any third party to use the tokens but, on the other hand, the owner thereof waives its right to use the tokens. Since lending may sometimes include the provision of collateral, it is possible that staking would be regarded as a form of lending, although there is no such determination to date.

Nonetheless, the offering of securities or joint investments is subject to regulations, so the offering of joint staking services may also be subject to such regulations.

See 10.3 Legal Entity Options.

See 10.3 Legal Entity Options.

As far as is known, there has not yet been any use of Israeli legal entities for the facilitation of DAOs.

None of the corporation legislation (ie, the Companies Law, 1999; the Partnership Ordinance, 1975; the Associations Law, 1981; and the Cooperative Association Ordinance) encompasses DAOs and therefore such arrangements are likely to be regarded as trust arrangements, which in Israel are non-incorporated arrangements.

As such, DAOs cannot interact with non-blockchain entities such as the Tax Authority, banks and service providers, and therefore require the facilitation of a recognised local legal entity. The main drawback is the inevitable contradiction between the rules pursuant to the legislation applicable to any type of entity chosen and the terms of the DAO. Although the corporation legislation generally allows some level of flexibility through the incorporation documents, some legal rules and requirements are unconditional and cannot be changed or waived.