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Israel to classify most digital assets as securities


The Israeli Securities Authority (ISA) has proposed a series of legislative changes relating to digital assets, inviting comments by February 12. Where a digital asset is a financial investment, it will be treated as a security. The aim is to provide greater clarity about which digital assets are regulated by ISA, and to prevent areas where investments are unregulated because of definitional issues. Regulatory efforts have accelerated following cryptocurrency collapses such as FTX and Israeli-linked Celsius.

The proposals follow a November 2022 publication by the Ministry of Finance regarding plans for regulating the digital asset sector. More on that later.

Digital assets or crypto-assets have numerous definitions around the world. The proposed Israeli one for digital assets: “a digital representation of a value or right, used for the purpose of financial investment, and can be transferred and stored electronically by using distributed ledger technology (DLT) or another technology.”

Even though digital securities already exist, the proposed amendments will remove format requirements such as the need for a written document. It will also expand the definition of securities to include securities offered as digital assets (already in scope) as well as digital assets used for financial investment. The latter is a departure because all securities currently need to be ‘financial instruments’. The ISA also has the authority to issue additional instructions and has oversight over digital asset derivatives.

Israel’s law on joint investments will be expanded to include digital assets. And legislation relating to investment consulting, marketing and portfolio management will, in the future, include digital assets.

Ministry of Finance approach

In November last year, Israel’s Ministry of Finance published a series of proposals aiming to encourage innovation and also reduce risks. It intends to complete a licensing process for digital asset service providers (DASPs). Ideally, the Ministry wants to consolidate oversight of digital assets into a single regulator. However, it also wants to ensure that ISA remains in charge of securities.

It plans to introduce comprehensive legislation for asset-backed digital tokens, including stablecoins.

In other news, the Israeli government announced a trial for government bonds in association with the Tel Aviv Stock Exchange (TASE) last October. The stock exchange subsequently published its distributed ledger (DLT) strategy.

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