An overview of the recent history, regulation, and innovation that has launched Israel into the international blockchain sphere.

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“The Startup Nation”

Israel has the highest density of startups per capita in the world, and was recently rated #10 in Bloomberg’s 2018 Innovation Index. With a longstanding background in cyber security, military advancement, and government investment in technology, Israel has uniquely positioned itself as an incubator for early-stage companies. Israel was the first country to incorporate research and development investments into its GDP. Between 2006–2015, over 1,000 tech startups exited in Israel with over $60 billion in capital. In 2016, Israel boasted the second highest percentage of engineers and scientists of any country.

In short, Israel has long been considered the “Startup Nation.” Blockchain, naturally, was on its horizon from the earliest days of the technology. In 2016, Deloitte profiled Israel as a”hotspot” for blockchain innovation.

Blockchain Innovation

Israel’s unique startup culture poised it for blockchain success early on. The same Deloitte report from 2016 reported that 430 fintech startups were located in Israel, suggesting that blockchain for finance would be the first and largest major investments for the technology. In 2016, 38 blockchain startups were based in Israel. In 2017 alone, the country’s startup ecosystem witnessed a 50% increase in blockchain companies, with no sign of slowing down.

Regulatory Progress

Cryptocurrency regulation has been a focus by regulatory bodies across the world for years. The lack of certainty or establishment of regulation has had drastic effects on how many blockchain companies emerge, where they are founded, and what markets they disrupt. Israel, like most governments globally, has been most focused on protecting investors from risky and fraudulent cryptocurrency trading rather than stifling the development of the underlying technology. As early as 2013, Israeli regulators were looking into the tax implications of crypto. In 2017, the Israeli Securities Authority (ISA) established a committee to research the application of finance laws to token sales and cryptocurrency. 2018, however, proved to be the year with the most publicity and clarity from the Israeli government on its attitude towards cryptocurrency and blockchain.

In early 2018, the ISA made two announcements. First, they would ban companies heavily involved in bitcoin from the nation’s stock exchange indices. The decision was made to protect “passive” investors from putting their money in companies who invest heavily in cryptocurrency and could be negatively affected by its severe volatility and regulatory uncertainty. The announcement came in conjunction with a general warning to Israeli citizens about the dangers of investing in cryptocurrencies and tokenized assets.

Soon after the ban on stock exchanges indices, the Israeli Tax Authority (ITA) declared Bitcoin was not a “currency” or security and would instead be considered and taxed as a property — at capital gain rates of ~25%. The set of token sale recommendations released by the ISA around the same time established three pillars of thoughts about classifying tokens.

Cryptocurrencies designed to be used exclusively as a form of payment or exchange, are not specific to a single venture, controlled by an individual party, and that do not grant the holder rights would not be considered securities. Cryptocurrencies that denote the right to a product or a service, received or purchased only for consumption purposes, and not treated as an investment would not be considered securities. Cryptocurrencies that grant the holder rights — similar to the rights granted today by shares and bonds — would be considered securities.

Altogether, Israel’s approach to regulation has been fairly in-line with that of other major crypto players. Laws are largely focused on protecting investors from volatility and fraud, followed by ensuring financial transactions through banks adhere to KYC and AML standards. Though such regulation has stifled the growth of blockchain startups globally in the short term, the clarity allows more room for legitimate ventures, investors confidence, and long-term blockchain growth.

Government Initiatives

Given Israel’s defense industry and heavy military investment, the government has been open to its integration of blockchain technology. The government has taken equal measure to invest in the underlying technology where applicable while also hedging against its potential usage for money laundering and fraud.

Just this month, the ISA announced its implementation of blockchain technology to address cybersecurity concerns. The blockchain solution, developed by Israeli cybersecurity firm Taldor, has been integrated into a system called “Yael,” which serves as the internal messaging system between the ISA and the other official departments under its umbrella. Yael is just the first example; the ISA has announced its intentions to incorporate the technology into a system for voting system and for the management of official reports, all within departments under the ISA.

As the government looks to leverage the benefits of the technology, it has taken public measures to ensure the technology is not used for malicious purposes. In May 2018, the State Attorney’s Office pursued a highly-publicized arrest of an Israeli citizen charged with fraud and money laundering through Bitcoin. The suspect was charged, and over 1,000 Bitcoin (~8 million USD at that time) was seized.

Just months after, in July, the Israel Tax Authority (ITA) announced its partnership with Bits of Gold, an Israeli-based cryptocurrency exchange. Bits of Gold had agreed to notify the ITA of any transfers of over $50,000 occurring over the platform. The partnership is significant because it is voluntary — Bits of Gold was not subject to any legal power compelling it to provide customer data to a government body. The announcement, however, reveals the public and private sectors’ desires to work together to ensure AML standards in a longer-term vision to instill crypto and blockchain confidence in potential investors, entrepreneurs, and technologists.

International Partnerships

Key to Israel’s future success as a blockchain powerhouse will rely on its relationships with other emerging crypto-leaders across the world. In the past year, Israel has made major strides in aligning itself with the Asian crypto market and with Switzerland, home of “Crypto Valley.”

In July 2018, the Asia Israel Blockchain Association (AIBA) was announced to bring Israel and Asian crypto-power such as China, Korea, and Singapore in closer collaboration. The network, though still in its infancy, will likely provide Asian blockchain companies with access to Western markets and will allow Israeli crypto companies to fastback their entrance into the Asian economy. As its first major announcement, AIBA is partnering with Chinese blockchain consulting firm Block72.

Just last week, Israel and Switzerland announced plans to collaborate on future blockchain developments. The announcement came on the heels of the Swiss Finance Minster’s and International Financial Matters Head’s visit to Israel. The countries stated their commitment to working together on future issues including regulation, cryptocurrencies, and fintech. Switzerland — specifically the city of Zug, dubbed “Cryptovalley” — has established itself as the seat of blockchain integration into traditional, global financial entities. Israel’s closening relationship with Switzerland could signal a purposeful move towards investing in globally interconnected, enterprise-grade blockchain solutions in addition to its proliferation of young, scrappy startups.

Looking Ahead

Israel has established itself as a legacy blockchain sandbox committed to preserving and growing its influence in emerging blockchain-based economies. In November of this year, ConsenSys Labs — the innovation arm of ConsenSys — is coming to Tel Aviv for a weeklong Pitch Week. The event will provide Israeli Ethereum startups with the opportunity to pitch their ideas directly to ConsenSys investors for an opportunity to receive investment and support. Interested in presenting your idea? Apply here to the ConsenSys Labs Israel Pitch Week.

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