After the warnings to investors published last week by the Israel Securities Authority, the committee for examining and regulating initial offerings for cryptocurrencies (ICOs) today submitted its interim report to Securities Authority chairperson Anat Guetta. The Securities Authority stated, "The report includes a series of recommendations aimed at bolstering certainty and balancing technical innovation against protection of investors."
The committee submitted its recommendations to the Securities Authority after more than six months of work. The Securities Authority adds, "The primary task of the committee, headed by Securities Authority chief economist Dr. Gitit Gur-Gershgoren and outgoing corporate department head Advocate Moti Yamin, was to consider the applying of the Securities Law to ICOs in Israel, based on the distributed ledger. The committee was asked to study and define these ventures, prepare a comparative review of the law in various countries, and recommend a regulatory plan in matters pertaining to securities law, while balancing the encouragement of technological innovation against protection for investors."
According to the interim report, the committee distinguishes between a cryptocurrency used exclusively as a means of exchange and a token, which it defines as a "special cryptocurrency conferring rights in a specific venture." With respect to tokens, the committee also distinguishes between a security token or an investment token - "a token that confers ownership rights, participation, or membership in a specific venture, or rights to future cash flow from such a venture," and a utility token - "a token that confers usage rights in a product or service offered by a specific venture."
"This industry will make a contribution to economic growth"
The committee's recommendations state, "A cryptocurrency shall be considered a security according to the array of circumstances and characteristics of each case, taking into consideration the purpose of the law. Cryptocurrencies conferring rights similar to those of conventional securities, such as shares, bonds, or participation units, shall be considered securities."
On the other hand, the committee recommended to the Securities Authority, "As a rule, cryptocurrencies designed to serve solely as a means of payment or exchange other than in a specific venture, which do not confer additional rights, and which are not controlled by one important party, shall not be considered securities. Cryptocurrencies implying a right to a product or service, which are purchased solely for consumption and use, shall not be considered securities. In this context, the relevant distinction is the actual aim of the purchase - the absence of any real ability to use a token at the offering stage or the presence of any option to trade in it in a secondary market is likely to indicate that its purchase is for purposes of investment, not consumption."
The committee further recommends "considering the use and extension of special existing and future capital raising tracks for ICOs, including consideration of lenient regulation for ICOs on a limited scale; the option of raising capital through cryptocurrencies on crowdfunding platforms; establishing a temporary framework for trial ICOs and advising entrepreneurs in this context on a format of a regulatory sandbox; and consideration of the possibility of relying on foreign regulation applying to cryptocurrencies in this matter."
The committee's interim report states, "If ICOs are held according to a prospectus, it will be necessary to adjust the disclosure requirements in the Securities Law to the special characteristics of this category, as was done with other spheres of activity (real estate, oil and gas, medical companies, etc.)" The committee also states, "The question of whether a cryptocurrency offering constituting a security is regarded as an offering to the public shall be considered according to the characteristics of the offering. An offering shall not be considered an offering to the public if its characteristics clearly indicate that it is not meant for the public in Israel (for example, according to the language of the offering and the absence of marketing, advertising, and appeals to investors in Israel). The committee is also considering the question of whether it is necessary to adapt the existing tests for the offering to the distributed and inter-territorial character of ICOs."
The Securities Authority notes, "In view of the innovation, complexity, and dynamism of this sector, for which regulations are still in the process of formulation, both in Israel and overseas, the committee's work should be considered from the perspective of time. In view of the rapid developments in this sphere, many things are likely to change in the sector within a short time and put the committee's findings in a different light."
Guetta said, "The relevance of regulators lies in their ability to bridge and balance between technologies developments that progress brings with it and fulfilling the mandate for which the regulators were established. The industry based on distributed ledger technology (DLT) is an innovative industry with the potential to change and streamline the world of finance as we know it. Israel's unique characteristics and global status in this industry can result in the industry making a contribution to economic growth in Israel. The Securities Authority will continue studying and monitoring the developments in the sector."
Published by Globes [online], Israel Business News - www.globes-online.com - on March 19, 2018
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