The Current Status of Crypto Adoption in Israel
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Cryptocurrency adoption in Israel extends well beyond the tech community, further affecting an ever-larger share of the general public. Israeli brokers have provided crypto trading for over a decade, while Israeli consumers have readily embraced international platforms that facilitate the buying and trading of digital assets.
The Israeli Crypto, Blockchain, and Web3 Companies Forum was established in 2022, and spearheaded by Nir Hirschmann-Rub and Shauli Rejwan.
According to the Israeli Crypto Blockchain & Web3 Companies Forum (iCryptoForum), at least 174 blockchain-related companies are based in Israel, with around 3800 professionals. Israel's involvement in crypto investments, algo trading, cybersecurity, RegTech, and technical infrastructures further places them top of the global crypto market.
The Israeli Bitcoin community came into existence as early as 2011, subsequently giving rise to the Israeli Bitcoin Association in 2013, a nonprofit entity committed to extending exposure and use of Bitcoin and other cryptocurrencies. The association has been very effective in maintaining a positive atmosphere, promoting education, and supporting the benefits of crypto.
Among the developments observed in Israel's cryptocurrency regulation environment, one notable example is the Bank of Israel's plans for the nation's CBDC, also known as the "digital shekel." While still in the study phase, the possible issuance of such might positively impact Israel's financial environment.
The digital shekel would make all digital transactions easier, potentially reduce financial friction, and have wider use by the general public if or when it's adopted.
At the same time that the Bank of Israel demonstrates its proactive stance toward CBDCs, the effect of this on decentralized digital assets is yet to be fully realized. The CBDC would need to compete with privately issued cryptocurrencies, particularly stablecoins.
This could shape public perception and policy on digital assets in Israel and might affect future legislative approaches toward stablecoins.
Crypto Law In Israel
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Over the years, Israel has taken several significant steps toward institutionalizing the norms of regulating cryptocurrency. Israeli legislation lagged behind the development of cryptocurrency, even as blockchain technology started to achieve broad recognition among the country's tech-savvy community.
The Authority protects the stability of the institutions under its supervision to maintain proper management and ensure the institutions meet their obligations to the public. The Authority works to maintain fairness and professionalism for services provided to customers, verifying the various products offered to the public are appropriate.
The beginning of this change came in 2016, with a ruling by Israel's Capital Market Authority (CMA), the regulator in charge of the country's savings and insurance, highlighting the essence of a license for prospective brokers or custodians of virtual currencies, meaning a license is required.
While the framework was established in 2016, the first license for a cryptocurrency was issued just this September. Four licenses have since been issued, showing increased regulatory capacity. The process eliminated the need for self-regulation that crypto companies had initially reverted to because of the absence of formal oversight.
The policy report of the Ministry of Finance identifies the completion of the licensing process of Digital Asset Service Providers (DASPs) and recommends removing barriers within the current regime that would better allow integration between the crypto market and Israel's banking infrastructure.
Apart from the CMA, other regulators in Israel, such as the Israeli Securities Authority (ISA) and the Bank of Israel (BOI), are involved in the crypto sphere. For instance, the ISA plays a significant role regarding security token regulation and is very active in the promotion of necessary legislative adjustments to further improve the regulation of digital assets.
This wider regulation includes those activities that would normally fall under the purview of the ISA, such as fund management and advisory services, but also extends to trading platforms that operate in digital assets.
Conventionally, banks in Israel have shown wariness in accepting deposits from cryptocurrency transactions due to perceived risks in AML compliance. In response, the BOI's imposition of new policies—such as Directive 411—seeks to standardize how banks conduct risk management when it comes to virtual currency transactions.
This compels banks to develop internal policies as to how they can handle risks involving virtual assets without broadly declining services. In November 2021, Israel's Money Laundering and Terror Financing Prohibition Authority developed comprehensive regulations that put the AML standard of Israel at par with global best practices.
The regulations introduced strict KYC requirements, blacklist usage, and reporting mechanisms for the deterrence of financial crimes interlinked with digital assets. These are the regulations that, if adhered to, would further ensure a safer market and help in gaining confidence from more conservative financial institutions for crypto companies operating in Israel.
Taxation of Cryptocurrency in Israel
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Israel has developed a clear but complex system of taxation for digital currencies. This goes to show that investors and businesses alike need to be more informed about regulatory environment implications on taxes.
ITA has gone to great lengths to establish guidelines that classify cryptocurrency as an asset, which can lead to several transactions falling under the umbrella of capital gains tax and, under certain conditions, income tax as well.
The ITA treats the said cryptocurrency transactions as capital in nature through its Income Tax Circular 05/2018; therefore, gains from the sale of any form of digital currency, including Bitcoin, should be considered capital in nature.
The term 'capital in nature' suggests that every disposition of cryptocurrency—such as sale and exchange—should be a taxable event wherein gains are measured for capital gains tax purposes. This means that individuals have to account for and pay income against gains every time they make a sale or trade concerning their digital assets.
For businesses, the taxation framework is far more complex. Many of the business crypto-related transactions are classified as ordinary income from a business, thereby becoming subject to an income tax rate rather than lower capital gains rates.
This is especially important for entities that are active traders, crypto miners or offer cryptocurrency services. This means that organizations dealing with crypto have to observe increased administrative and reporting duties with respect to taxes, which is complex in itself and requires very detailed financial planning.
According to the ITA, digital currency is considered an “asset” for Israeli tax purposes and, therefore, any sale of digital currencies triggers a tax event for the seller.
In this regard, the ITA has identified what makes cryptocurrency so unique and may make taxpayers' compliance difficult. To this end, the ITA promulgated the "Temporary Procedure for Accepting Tax Payments from Profits on the Realization of Decentralized Payment Methods" on December 23, 2023.
This procedure provides a compliance path that crypto investors and businesses can follow to pay taxes on the gains obtained through virtual currencies, even when banks may feel hesitant about receiving such funds. Under this initiative, the taxpayer must adhere to a set of conditions to secure acceptance of tax payment. These include:
- Proof of bank refusal: The taxpayer shall provide sufficient proof that their commercial bank refused to accept tax payments from the funds derived from crypto-related transactions.
- Accurate Activity Reporting: Taxpayers have to report their entire activity involving virtual currencies, describe their taxable income from such activities, and point out the amount of taxes owed.
- Paying Shekels and Accounts Abroad: The tax shall be covered in Israeli shekels, which can be transferred from foreign bank accounts held with crypto exchanges, investment houses, or other types of financial service providers.
- Compliance Documentation: A taxpayer is supposed to attest through an affirmation of the source of funds used to invest in the cryptocurrency, proving that such funds were from legitimate sources. They are also supposed to provide a "virtual currency road map" detailing all transactions to help establish that the assets are not part of any money laundering scheme.
For businesses, frequent trading, mining operations, or accepting crypto as a regular form of payment often means that the revenue is considered to be business income, making it subject to standard income tax rates. Taking into consideration the complex nature of Israel's taxation of cryptocurrency, professional tax planning is highly recommended for any business investor.
Factors Driving Crypto Adoption in Israel
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The following are the five leading factors that have motivated the increasingly growing adoption in Israel of cryptocurrency:
Tech-driven Culture and Innovative Ecosystem
Advanced technology, together with innovative culture, has earned Israel the nickname "the Startup Nation." This nation boasts of a quality human resource base that comprises highly trained people and supportive tech industries. These features have made the country one of the hotspots for innovation in blockchain and cryptocurrency.
Investment Opportunities and Financial Inclusion
Israel offers a viable avenue for investment as it features a wide populace—from technology-savvy people to conventional investors who are interested in high growth. The investment community of Israel welcomes digital assets with both arms, seeing them as alternative means against traditional markets.
High Awareness and Positive Media Coverage
The public awareness of cryptocurrency in Israel has grown a lot with supportive media coverage, educational initiatives of universities, and private organizations. Similarly, Israel’s local media is ripe with high-profile developments such as the Bank of Israel researching a digital shekel, potentially an Israeli CBDC, other positive regulatory advances, and success stories of blockchain startups.
Active Regulatory Framework
Israel has managed to develop quite a lot in building a regulatory environment for digital currencies, which eased some uncertainty about crypto investments. An example is the licensing of crypto businesses by the Capital Market Authority, the Israeli Tax Authority statement on tax rules for digital assets, and new AML/KYC regulations.
Challenges Facing Crypto Adoption in Israel
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As Israel's growth continues to present a very promising outlook for cryptocurrencies, here are five significant challenges facing crypto adoption in Israel:
Restrictive Banking Policies
One of the primary challenges for cryptocurrency adoption in Israel is the cautious stance taken by Israeli banks towards crypto-related funds. Banks often hesitate to accept deposits from cryptocurrency transactions due to concerns over anti-money laundering (AML) and regulatory compliance.
Complex and Evolving Regulatory Landscape
While Israel has taken steps toward establishing a regulatory framework, the crypto landscape remains complex and somewhat fragmented. They also have a regulatory framework that can be challenging to navigate, especially for startups and new investors. This evolving legal environment creates uncertainty for businesses trying to ensure compliance, discouraging some companies from entering or expanding in the Israeli market.
Tax Compliance Burdens
The Israeli Tax Authority’s (ITA) stance on crypto taxation, while clear, imposes significant compliance burdens. Cryptocurrency is classified as an asset, meaning each sale or trade triggers a taxable event subject to capital gains tax. These tax requirements are complex and require meticulous record-keeping for active traders or crypto businesses.
Limited Access to Traditional Financial Services
Crypto users in Israel face limited access to essential financial services, such as loans, credit, and mortgages, due to banks’ reluctance to recognize cryptocurrency holdings as collateral. Despite the market value of their crypto assets, investors often find that banks view these assets as too risky to be accepted within the traditional finance ecosystem.
Potential Benefits of Crypto Adoption
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Here are five potential benefits of crypto adoption in Israel:
Increased Financial Inclusion
Cryptocurrency has the potential to increase financial inclusion by providing access to financial services for those who may be underserved by traditional banks. In Israel, where the banking sector is cautious about lending and account access for certain groups, cryptocurrencies offer an alternative means for individuals to make payments and even access investment opportunities.
Enhanced Economic Innovation and Growth
Israel is known for its thriving tech sector, and cryptocurrency adoption can further fuel innovation and economic growth. By embracing blockchain and crypto technologies, Israel can support a wave of new startups and nonprofits (e.g. Crypto Aid Israel) and attract foreign investment in the digital economy.
Greater Transparency and Security in Transactions
Blockchain technology, which underlies cryptocurrencies, offers inherent transparency and security benefits. Transactions recorded on a blockchain are publicly viewable, immutable, and auditable, reducing the potential for fraud and errors. For Israel, adopting crypto could bring added transparency to various sectors, from finance and government to retail and logistics.
Reduced Costs and Improved Efficiency in Payments
Cryptocurrencies can streamline payments and significantly reduce transaction costs, especially for cross-border transactions. Traditional payment systems and banking networks often impose high fees and delays, particularly for international transfers. With cryptocurrencies, individuals and businesses in Israel can make near-instant, low-cost payments regardless of their location.
Conclusion
Israel stands at a pivotal moment in its journey toward cryptocurrency adoption, a journey that holds both promise and complexity. The country’s vibrant tech culture, paired with an increasing demand for financial innovation, has laid a strong foundation for blockchain and digital assets to flourish.
However, challenges remain and overcoming these hurdles will require a collaborative approach. For investors, businesses, and innovators, the future of crypto in Israel offers a compelling stance that could redefine the financial landscape in ways we are only beginning to imagine.
