ISA Makes First-Time Decision on How Cryptocurrency Asset Offerings Will Be Regulated

The committee appointed by the Israel Securities Authority (ISA) to examine regulation of cryptocurrency offerings to the public has published the outline of its regulatory policy in a final report submitted to the ISA chairman. The committee recommended focusing on regulatory models that offer structural flexibility, since this is a new and dynamic field, and regulating it through rigid legislation at this stage is likely to be ineffective, both in terms of developing the industry and protecting the public’s investment in securities.

On the one hand, the committee recognized how important it is for the ISA to take an active part in creating a regulatory framework and effective measures to assimilate technological progress in the capital markets. On the other hand, the committee clarified that since the ISA’s main role is to protect investors, it must ensure the innovative technology is being used fairly and in a manner that guarantees investors’ interests are protected.

The committee stated that it believes the industry, which is based on distributed ledger technology, is an innovative one with the potential to streamline, improve, and develop the financial sector and to strengthen the Israeli economy. This contribution can be reflected, inter alia, in this technology’s role in the development of new means of financing for Israeli companies and in making diverse investment venues accessible to the Israeli public.

The committee’s key recommendations:

Special disclosure regime – An offering and sale to the public of cryptographic assets that meet the definition of “securities” will be subject to publication of a prospectus and the reporting obligations regulated by Israel Securities Law. The disclosure will be adapted to the unique characteristics of the companies seeking to raise money through an issuance of cryptographic assets. According to the committee’s conclusions, the special disclosure requirements will place emphasis, inter alia, on the underlying rights in the assets, the entrepreneurs’ experience, the development objectives, the timetables, the costs involved, and the data security and cyber risks.

Concessions and criteria for activity in the regulatory sandbox – In February 2019, the interministerial team for the establishment of a “regulatory sandbox” published its recommendations, with the main objective being to enable a more lenient regulatory environment tailored for fintech companies. The regulatory sandbox is intended to eliminate the need to comply with all of the regulations that apply to companies developing a new financial service or product, provided that these companies’ activities are restricted in particular ways. The committee’s conclusions are that it should be possible to allow companies offering cryptographic assets to use this sandbox, since such innovative activity should be encouraged.

Special platform for trading in cryptographic assets deemed securities – The committee recommended implementing adjustments to the existing regulations applicable to exchanges and clearing platforms, which will also be adapted for trading in cryptographic assets, in order to enable reliable and safe trading with these assets.

The crowdfunding model – The committee recommended applying a model with characteristics similar to those of the crowdfunding model (which regulates fundraising from the public at relatively low amounts and without a prospectus) also to cryptographic asset ventures that meet the definition of “securities.”

The report reflects the ISA’s position that the Israel Securities Law should also apply to offerings of cryptographic assets. Nevertheless, the committee stated that adjustments to the disclosure regime should be considered to adapt it to the unique characteristics of cryptographic asset activity. However, it added that, at this stage, the current regulatory framework will apply. The committee also recommended establishing a more lenient regulatory framework customized to companies operating in this market, whether through the model of a regulatory sandbox (after it is established) or through making adjustments to the trading and clearing regulations.

Clients interested in operating in the blockchain industry, or considering an offering of cryptographic assets, must first consider whether the cryptographic asset being offered meets the definition of “securities” according to the set of circumstances and characteristics of their specific offering. They must then adapt their activities accordingly.