In First, Arrangements Law Includes Extensive Reference to Digital Assets

As part of the Arrangements Law for the years 2023-2024, the Israeli government makes extensive reference to expanding and creating a regulatory infrastructure in the digital assets field. As part of the draft bill (also called the “economic plan”), the government refers, inter alia, to regulation in a number of different areas, including stable-coins, taxation, and more.

Capital Market, Insurance and Savings Authority’s Regulatory Spheres

The proposed draft bill seeks to amend the Control of Financial Services Law to empower the Supervisor of Regulated Financial Service Providers to grant licenses to foreign entities that apply to provide financial services in Israel, provided they meet the prescribed license conditions. This move aims to enhance regulatory oversight and provide more opportunities for foreign entities to offer financial services in Israel. Inter alia, the Supervisor must be convinced that the foreign entity provides adequate protection to customers and complies with conditions regarding the prohibition of money laundering and the financing of terror.

Israel Securities Authority’s Regulatory Spheres

The draft bill proposes to amend the laws under the purview of the Israel Securities Authority, in line with the ISA’s earlier proposals to amend securities laws. This step aims to update the legal framework surrounding digital assets and provide appropriate protection to investors in this sector.

Proposals regarding the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law

1. The draft bill proposes to mandate entities providing investment advice, marketing, and portfolio management services in relation to digital assets to obtain a license. This requirement will apply to those engaging in financial investment activities with digital assets that are not currently covered by existing laws.
2. The Israel Securities Authority will be empowered to adjust the supervision of investment advice, investment marketing and investment portfolio management, at its discretion, in order to provide appropriate protection to investors in digital assets.

Proposals regarding the Joint Investment Trust Law

1. The Joint Investment Trust Law will also apply to joint investments in digital assets.
2. The Israel Securities Authority will be empowered to adjust the supervision of joint investments in digital assets at its discretion.

Proposals regarding the Securities Law

1. The provisions of the Securities Law will apply to stock exchange activities, securities clearing house activities, and digital asset trading arenas that do not fall under the application of the existing law.
2. The Israel Securities Authority will be empowered to adjust the supervision of these activities at its discretion.

Taxation Issues

Classification of digital assets for tax purposes

1. The draft bill aims to clarify the taxation of digital assets and their classification as “assets” for tax purposes under the Income Tax Ordinance and the Value Added Tax Law. It includes provisions to ensure that activities involving digital assets are subject to appropriate taxation and reporting requirements and establishes rules regarding the location of a digital asset.
2. The draft bill also proposes provisions prescribing the methods for proving the original price of a digital asset, reporting obligations regarding activity in a digital asset, and rules regarding the payment of advances for income deriving from digital assets.

Taxation of transactions

1. The draft bill proposes provisions regarding taxation of activities with digital assets, including rules regarding withholding tax on income from activity in digital assets being executed through supervised and licensed entities in Israel.
2. The draft bill proposes establishing an exemption from the annual reporting due to the sale of a digital asset carried out through a supervised and licensed entity, if the taxpayer’s total turnover of digital asset transactions is less than ILS 2,500,000, and on the condition there is no obligation to report due to other circumstances.

Disclosure obligation

The proposed draft bill seeks to make it mandatory for taxpayers to disclose their holdings of digital assets worth more than ILS NIS 200,000 to the Israel Tax Authority, as long as these holdings are not through a supervised entity. This provision is intended to improve transparency and enable the tax authority to better monitor digital asset holding.

Proposals Regarding Supervision of Stable Digital Currencies

1. To define a stable asset based on the principles that the asset constitutes a digital asset designed to sustain a stable value by pegging it to the value of legal tender or to the value of foreign currencies.
2. To decide the identity of the authority to be delegated the licensing, supervisory, and regulatory authority over entities engaging in the minting and issue of stable digital coins.
3. Upon identifying a supervisor for stable digital assets, a memorandum of law will establish guidelines for the issuance and minting of stable digital coins, delegating regulatory authority to the designated supervisor, as follows:
   1. Principles and criteria pertaining to the characteristics of the backing assets and the ratio of backup that will apply to entities issuing such assets. These criteria will be determined by the supervisor in consultation with the Governor of the Bank of Israel.
   2. The supervisor will be able to declare a stable digital asset as significant, thereby transferring the supervision of the issuer to the Bank of Israel. The supervisor will make this declaration, after consultation with the governor of the Bank of Israel and the director general of the Ministry of Finance, and only if the issuer fulfills the quantitative and qualitative criteria. The supervisor will also be able to decide that a stable digital asset has no longer fulfilling the criteria, and therefore, the Bank of Israel should return supervision to the supervisor. Under the draft bill, the Bank of Israel would have the authority to refuse to transfer supervision of an issuer of stable digital assets if it determines the asset has no significant stabilizing or monetary impact. This provision aims to ensure effective oversight and prevent unnecessary administrative burdens on the regulatory system.
   3. The criteria for determining the regulatory rules pertaining to significant stable digital coins will be defined by the Governor of the Bank of Israel in consultation with the supervisor.
   4. The Minister of Finance, with the consent of the Bank of Israel and after consultation with the supervisor, will determine the conditions for defining a significant stable digital coin.  
   5.  
   6. The Bank of Israel will continue transferring relevant information to the supervisor, even after the supervisory authority over the issuer of a significant stable digital asset is transferred from the supervisor to the Bank of Israel.
   7. The criteria to be prescribed in regulations defining a significant stable digital asset will be reviewed at the end of two, four and six years after the date the law takes effect.
4. The Minister of Justice, in consultation with the Minister of Finance, will ascertain, within the timetables for disseminating the memorandum, whether there is a need for consumer regulation in the law governing stable digital currencies.

Proposals Regarding the Banking System

Executing payments

Under the draft bill, the government will explore options for taxpayers to pay taxes on profits earned from digital asset activities by depositing payments into an account managed by the Bank of Israel. This proposal aims to streamline the tax payment process for digital asset activities and improve government oversight of this growing sector.

Monitoring infrastructure

The proposal states that the Supervisor of Banks intends to create infrastructure for reporting and monitoring refusals to provide banking services to entities operating in the field of digital assets and their reasons.

DAOs

The draft bill acknowledges that decentralized autonomous organizations (DAOs) are not currently recognized as legal entities or companies in Israel. To address this, an inter-ministerial team will be established to determine the appropriate corporate status and tax treatment for DAOs, distinguishing between financial and non-financial activities.

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Barnea Jaffa Lande’s Capital Markets Department is at your service to advise you with regard to any matter pertaining to the provision of digital financial asset services.

Adv. Andrey Yanai is a partner in our firm’s Capital Markets Department.

Adv. Avihai Tal is an associate in the department.