Securities, Digital and Financial Assets: New Definitions

The Israel Securities Authority recently promulgated its revised legislative proposal addressing the applicability of securities laws to digital assets. The proposed legislation aims to determine how securities laws will apply to actions involving digital assets, and to allow the ISA to provide guidance with regard to the risks inherent in investing in digital assets.

The new draft bill builds on public comments received after the promulgation of the ISA’s initial proposal in December 2022. The initial proposal received numerous comments from the industry, and the ISA addressed a significant portion of the comments in its revised draft amendment.

Following are the highlights of the revised draft amendment.

Latest Definitions

Securities Law

The draft amendment defines the term “digital investment asset” as “a digital asset for the purpose of financial investment, whether or not that is its sole purpose.” The proposed definition partially adopts the subjective American Howey test. The definition also specifies a number of exceptions that will not be considered digital investment assets. The exceptions are, inter alia, stablecoins, CBDCs, NFTs, and assets that will be determined by the Minister of Finance, based on the suggestion of or in consultation with the ISA.

The draft amendment defines a digital investment asset (according to its new definition) under the definition of “financial instrument.” This definition includes securities (both “regular” and “digital assets”), as well as digital investment assets that are not securities. The ISA emphasizes that the definition does not purport to imply that digital assets cannot be securities in and of themselves.

The initial draft amendment included an amendment to the definition of “securities” in section 1 of the law. This amendment proposed that certificates issued by a individuals (not solely corporations) would also fall under the definition. However, the ISA later determined that this amendment was unnecessary within the context of the crypto sector, and therefore decided not to link the two.

The revised draft amendment amends the definition of “digital asset” and replaces the term “other technology” with the term “similar technology,” thereby narrowing the variety of financial assets that may be included under the broad definition. (The ISA opted to adopt the definition according to the wording of the European Markets in Crypto-Assets Regulation.)

Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law

The ISA excludes digital assets deemed as securities under the law from the definition of the term “financial asset.” The ISA also eliminates the reference to index products from the definition of “financial asset.” We note that, following the amendment, securities of private companies can also be included under the definition, thereby broadening the Investment Advice Law.

Joint Investment Trust Law

The revised draft amendment expands the applicability of the Joint Investment Trust Law to types of digital assets both classified and not classified as securities

Additional ISA Clarifications

The ISA rejects the argument that a designated regulatory framework for digital assets should be created, positing, inter alia, that such a framework might leave an opening for circumventing the obligatory regulatory framework pursuant to securities law. This would then trigger higher compliance costs for the supervised entities due to the completely new regulatory framework. The ISA also raised the concern that the new regulatory framework will quickly become technologically irrelevant.

• The ISA emphasizes that the classification of an asset as a digital investment asset does not automatically mean that activities with the asset come under the scope of the Securities Law. With regard to the applicability of the provisions to stock exchanges and clearing houses, the management of a securities trading system or a clearing system as defined in the law will also be required.
• The ISA addressed decentralized autonomous organization (DAO) projects, stating that, in particular contexts, it may classify DAO ventures a security even under its current definition. The ISA noted the recent establishment of an interministerial committee, including members on behalf of the ISA, tasked with formulating recommendations for regulating DAO projects.
• The ISA rejects the request to exempt licensed financial asset service providers that provide services in virtual currencies from the need to obtain a license for marketing, guidance, and making digital currencies accessible. For this purpose, a suitable license to engage in these activities is required pursuant to the Advice Law.
• The revised draft amendment adds an amendment to the Prohibition on Money Laundering Law that applies its provisions to digital asset exchanges.
• The ISA is setting an initial one-year directive, thereby giving the market additional time to prepare for the inception of the proposed revised amendment.

The initial draft amendment to amend the applicability of securities laws had the potential to harm the crypto industry in Israel. However, the revised amendment shows that the ISA has been attentive to the public’s comments and softened its draft amendment. The revised amendment grants the ISA broad discretion to grant exemptions from specific provisions, empowering it to uphold a dynamic and adaptable regulatory framework. While this marks a positive stride, it remains crucial to vigilantly monitor the process and ensure that the amended draft does not unduly burden the crypto industry.

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Adv. Andrey Yanai, a partner in Barnea Jaffa Lande’s Capital Markets Department, and Adv. Avihai Tal, an associate in the department, are at your service to answer any questions pertaining to digital assets, blockchain, and more.