ISA publishes cryptocurrency IPO regulations

Anat Guetta  photo: Tamar Matsafi

Securities Authority: Supervision can contribute to progress in the cryptocurrency sector.

One year after publishing its interim recommendations for public comment, the Israel Securities Authority is publishing its final report for regulation of cryptocurrency offerings to the public. The committee, formed in August 2017, today submitted its report to Israel Securities Authority chairperson Anat Guetta.

The committee recommends imposing disclosure requirements under the Securities Law on offerings of cryptographic assets that constitute a security, consideration of creating a special platform for trading in cryptographic assets, and the implementation of a model with similar characteristics to crowd funding for cryptographic assets offerings.

The Israel Securities Authority also stated, "The committee recognizes the great importance of the direct connection between the Securities Authority and the sector in order to further professionalism among its employees, recognition of the sector by the Securities Authority, study of its special characteristics, and providing a fitting regulatory solution for it." The committee invited ventures "to contact the Securities authority for the purpose of carrying out cryptographic assets offerings, and undertook to consider their activity with an open mind, within as short a time as possible, and with the adoption of a flexible interpretation."

With respect to the cryptocurrency exchanges, the report states, "Up until now, no granting of regulatory approval in any country whatsoever to operate a supervised cryptocurrency exchange for the public has been reported. The platforms in this area are designed solely for sophisticated investors. At the same time, there are old trading platforms for cryptographic assets in the US market, such as Coinbase, which are developing this sector (through licensed broker-dealers, with SEC approval) and supervised conventional exchanges that have announced their intention of facilitating trading in these assets in the coming years. These include the stock exchanges of Gibraltar, Malta, Switzerland, Australia, and the London Stock Exchange, which is developing such a platform in cooperation with other companies in coordination with the FCA."

"Supervision can contribute to progress in the sector"

The main function of the committee, headed by Securities Authority chief economist Dr. Gitit Gur-Gershgoren and former corporate finance department Adv. Moti Yamin, was to consider applying the Securities Law to public offerings in Israel based on a distributed ledger and trading in them. The committee included employees from the various departments of the Securities Authority. Its work was coordinated by Adv. Idan Lange and Guy Sabah.

The final report states, "Since the interim report was published in March 2018, many changes in cryptographic asset offerings have occurred, both in the regulatory environment in Israel and overseas, and in the business and technological environment. The most significant trend in this context is the substantial moderation in ICOs, following a strong rise in early 2018. Offerings in Western markets in this sector are currently carried out mainly by sophisticated investors through offerings of cryptographic assets included in the definition of security token offerings (STOs), in accordance with the regulatory rules."

Commenting on this matter, Gur-Gershgoren said, "These trends reinforce the idea that the sector's success depends on its attitude towards regulation, among other things, and indicate that supervision of the sector is aimed at contributing to its progress, not at opposing it."

Guetta: The technology is here to stay

The Securities Authority continued, "After the interim report was published, the committee discussed the comments received from the public and held a series of meetings with parties active in the sector and institutions of higher education in order to clarify the issues raised, in addition to constant monitoring of the trends and developments in the sector and constant consideration of how regulators around the world are dealing with the phenomenon."

Guetta thanked the committee members, saying, "The cryptographic assets field proved to us over the past year that a careful and prolonged consideration of this dynamic and innovative sector enables us to make decisions that preserve the balance between the need to promote innovation and the obligation to preserve investors' interests. The excitement that permeated the sector in 2017 has cooled, but the technology is here to stay."

Guetta added, "One of the cornerstones of the strategy I presented to the Securities Authority for the coming years is adapting and promoting technological innovation in the capital market. Technological innovation can potentially streamline, improve, and enhance competition in the capital market and the entire economy. It must be verified, however, that it really serves the investors' interests. I call on the companies and the parties in the sector to maintain direct, continuous, and long-term contact with us in order to facilitate the sector's development."

A recommendation to found a special trading theater

The main recommendations in the committee's final report submitted to Guetta, which covers 57 pages, are as follows:

A special disclosure regime: "The committee recommends applying the Securities Law to cryptographic asset offerings, while considering adaptation of the disclosure requirements to the special characteristics of these companies' activity, among other things according to the experience to be acquired with applications by ventures to the Securities Authority for carrying out cryptographic asset offerings, or on the basis of the experience of regulators in other countries."

Concessions and creating conditions for activity in the regulatory sandbox: "The Securities Authority was part of an inter-ministerial team that recently recommended the establishment of an easier and adjusted regulatory framework for companies using new technology to provide new financial products and services. The committee recommends allowing their use in this framework to try them out on cryptographic asset offerings, and accompanying entrepreneurs in this format."

A special platform for trading in cryptographic assets: "The committee recommends considering adjustment of the existing regulation to create more suitable regulatory infrastructure for this trading activity in order to better cope with the risks incurred in this activity."

The crowdfunding model: "The committee recommends considering applying a model with characteristics similar to those of the crowdfunding model for cryptographic asset ventures that constitute securities."

The report states, "Capital raising from the public through cryptographic asset offerings based on initial coin offerings (ICOs) accelerated in 2017, reached a peak in early 2018 ($20 billion raised during that year), and has since greatly diminished. Israeli entrepreneurs and developers dominate the international blockchain sector, and a considerable number of companies operate in the sector in Israel, some of which have held offerings of this type over the past two years."

Israel Bitcoin Association: Important progress

In response to the report published today by the Securities Authority, Israel Bitcoin Association chairperson Meni Rosenfeld said, "The work was done seriously and professionally, with attention to the various players in the market. From our viewpoint, the important part is closing the loophole that enabled tokens to masquerade as cryptocurrencies used as a means of payment, thereby evading supervision, transparency, and the providing of value to buyers. This important step forward will enable additional concerns to trust the Israeli cryptocurrency sector, and will enable consumers to understand what they are buying - a means of payment that will enable them to shop in a grocery store or buy a share in a company.

"At the same time, the regulator still has a long way to go. Banks will not allow companies to hold bank accounts. The order under the Financial Services Providers Law, which is critical for activity in the sector, has not yet been approved, and other issues are also unsolved. I hope that the Bank of Israel and the government ministries take their cue from the Securities Authority and bring the startups in from the regulatory cold in which they are mired, which is liable to cause many ventures in the sector to close down."

Blockchain Forum: Breakthrough recommendations

Israel Blockchain Forum CEO Igal Nevo welcomed the committee's final conclusions, noting that the sector had eagerly awaited them. "This is a profound document, which shows how much the Securities Authority is informed about what is happening in the sector. The recommendations for creating a special platform for cryptographic assets trading and the applying of a model with the same characteristics as the crowdfunding model for cryptographic assets ventures that constitute securities are breakthrough recommendations. It is important that they be adopted quickly and enter the regulatory process." Nevo added that the recommendations indicated that the sandbox would be an important platform in shaping regulation and the necessary adjustments by all of the authorities. "The sandbox will be the game changer for the fintech and blockchain sector. It is important that an effort be made to expedite the writing and approval of the law as soon as the next Knesset is convened," he declared.

Nevo also said that the document shows that the Securities Authority regarded the blockchain sector as a high-tech sector with important technological and economic potential. He commented, "The blockchain sector is waiting for an essential arrangement of the regulatory theater. The Securities Authority's recommendations are indeed an important step forward. The Blockchain Forum undertakes to encourage the leading companies in the sector to maintain their direct connection with the Securities Authority, and to take part in the sandbox whenever possible."

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Anat Guetta  photo: Tamar Matsafi
Anat Guetta photo: Tamar Matsafi
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