CMS Expert Guide to Crypto Regulation in Israel

The Anti-Money Laundering Order (Obligations to Identify, Report and Manage Registrations of Financial Assets Service Providers and Credit Service Providers for the Prevention of Money Laundering and Terrorist Financing) (Amendment), 5721-2021, includes specific AML and KYC obligations for providers of exchange and custody services related to cryptoassets and for providers of non-bank credit.

The above assumes that the relevant cryptoassets would not be securities or considered securities under Israeli law. If cryptoassets are securities or considered securities under Israeli law, then applicable securities laws and regulations would apply.

Exchange and custody for cryptoassets are regulated under the Supervision of Financial Services (Regulated Financial Services) Law, 5776-2016 (the Financial Services Supervision Law) as “Services related to a Financial Asset”, unless one of the exemptions listed in such law applies. The Financial Services Supervision Law requires obtaining a license to engage in either of such activities.

Non-bank lending is also regulated by the Financial Services Supervision Law and requires a license unless one of the exemptions listed applies.

There are also general borrower protection laws in Israel.

If yield/staking is offered in a centralized manner it may be considered non-bank credit and require a license as aforesaid. Depending on the service offered, it may also be subject to the investment management laws and regulations.

Yield/staking may also be considered a security or debt security depending on the manner in which it is structured and offered.

The above assumes that the relevant cryptoassets would not be securities or considered securities under Israeli law. If cryptoassets are securities or considered securities under Israeli law, then applicable securities laws and regulations would apply. 

Obtaining a license would likely take at least 6 months. The Capital Markets, Insurance and Savings Authority in the Israeli Ministry of Finance (the CMA), which is the regulator with authority to grant licenses, issued the first license in September 2022, although the law requiring a license has been in effect since 2018, and therefore any timelines are only an estimate. Obtaining a license requires a local subsidiary.

If the business does not require a license, it generally takes up to a week to incorporate in Israel, and another 2-3 weeks to register the company with the tax authorities and to open a bank account. It may take a cryptoasset business longer to open a bank account, since the banks in Israel are very hesitant to open accounts for crypto-related businesses, or accept the deposit of funds whose source is from crypto into bank accounts.

As mentioned above, the CMA has within the past 4 years only granted a handful of licenses, so it is difficult to estimate.

With a specific client, we could approach the CMA on a no-name basis with details of the business to check whether it is a type of business to which they would be willing in principle to grant a license.

In order to obtain a license, physical presence and a local entity is required. In addition, the controlling person of the group applying for a license would be required to obtain a control license and must be willing to provide required personal information to the CMA.

Notably, the banks in Israel have very strict requirements in order to accept a deposit of funds whose source is crypto.