Israel missing out on blockchain, study finds


Israel Internet Association: Israel lacks regulatory infrastructure to support its extensive blockchain technology applications.

Israel is missing out on the potential benefits of blockchain technologies, such as making smart transactions, managing protected databases, and cryptocurrencies that can compete with the conventional monetary system. This conclusion is reached by a new policy document, a draft of which was published for the first time for public comment last week by the Israel Internet Association.

This comprehensive report, containing over 100 pages, is entitled, "Blockchain Technology in Israel: Disruptions, Uses, Challenges, and Obstacles." It states, "Despite the accelerated technological development and diverse applications of blockchain technology, regulation of the cryptographic space is still in its infancy. Like most countries, Israel has not yet formulated a holistic regulatory infrastructure to support the broad application of this decentralized technology and provide a general solution to the challenges that it presents."

According to its authors, the report, initiated by the Internet Association in cooperation with the Center for Cyber, Law and Policy (CCLP) at the University of Haifa, was designed "to assess the opportunities and challenges arising from the penetration of blockchain technology into various spheres, to indicate their consequences, and to offer policy recommendations." Among other things, the report recommends that the Bank of Israel "should reconsider the possibility of making it easier for blockchain ventures to open a bank account."

Among the participants in the writing of the report, which took a year, were CCLP founding director Prof. Niva Elkin-Koren, information security scholar Prof. Orr Dunkelman, Haifa Center for Law and Technology (HCLT) director Prof. Michal Gal, Prof. Jonathan Yovel and Prof. Orna Rabinovich-Einy of the University of Haifa, and  Gal Landau-Yaari. head of research at the Hogeg Blockchain Research Institute at the Tel Aviv University - Coller School of Management and a CCLP research fellow.

"To streamline database access"

The report explains, "Blockchain technology, which is part of the distributed ledger family of technologies (DLT), makes it possible to create a decentralized, consistent, and time-ordered database without a central player controlling the database contents. The technology is based on recording records in a block. After the records are recorded and approved by the approval mechanism installed in the technology, they cannot be deleted, similar to journal entries in bookkeeping. This technology became popular mainly because of the bitcoin network, which used these records to offer the first decentralized cryptocurrency, and to a large extent the main applications are still in monetary and financial contexts in the payment and capital market sectors."

The report authors nevertheless state, "Blockchain technology offers a different approach to solutions in a broad range of spheres beyond the monetary-financial context of creating cryptocurrencies and tokens. Applications of the technology can offer various improvements in conventional technological systems: management of large quantities of information requiring trust; streamlining access to databases and their use; creating standardization; improving the ability to coordinate and reduce work processes in order to cut costs and improve operating efficiency; enhancing transparency and access to data for many participants; improving accountability; bolstering information security; reducing exposure to the risk of deception, embezzlement, and fraud; etc.

"These applications underlie the attempts to expand the use of these technologies to other content realms: smart insurance, ensuring data reliability in medical files, managing existing state-run databases (such as the Land Registry and vehicle ownership registration), digital identification and management of digital identities (such as ID cards), managing online voting, managing supply chains, and so forth."

In the financial aspect of blockchain technology, the authors state, "A major problem found by this report, following research by the Bank of Israel and the Ministry of Finance, is the absence of proper legal infrastructure and regulation for creation and activity in cryptocurrencies. The attempt to apply law and regulations for standard financial activity to cryptocurrency activity by analogy ignores the latter's unique aspects: possibilities, risks, barriers and costs. Instead of trying to use regulatory patches imposed by various administrative agencies that are not necessarily applicable, the option of de novo regulation in the sector should be considered."

The report says that regulating the cryptographic space "involves an emphasis on three main areas: preventing money laundering, tax law, and protection of the investor. The cryptographic space also features global regulatory gaps, resulting, among other things, from the rise of local cryptographic powers, such as Malta, Gibraltar, Lichtenstein, and Switzerland, and in recent years, owing to Brexit, London as well. These places are expeditingg beneficial regulation aimed at attracting blockchain ventures and investors in the absence of clear global guidelines and methods of operation from the G7 and G20.

"This state of affairs subjects blockchain entrepreneurs and ventures to regulatory uncertainty. On the one hand, in the short term, it enables them to save costs incurred in meeting existing regulatory requirements in the conventional market. On the other hand, in the long term, it exposes them to many risks, which detracts from the motivation of many of the ventures to operate in markets with no clear regulation, including Israel," the report says.

"Formulate a plan for giving people knowledge"

The report's main recommendations are given very briefly here. First of all, they recommend that "the Israeli government should form an inter-ministerial team, headed by the director general of a relevant ministry, to take responsibility for devising a holistic approach that will promote innovative legal, normative, and regulatory infrastructure for advancing blockchain-based industries in Israel."

The report adds, "At a minimum, the inter-ministerial team should include senior representatives from the Ministry of the Economy and Industry; Ministry of Justice; Ministry of Finance; Ministry of the Interior; Israel Competition Authority; Israel Tax Authority; Israel Innovation Authority; Capital Market, Insurance and Savings Authority; Israel Securities Authority, Bank of Israel, National Economic Council, and Digital Israel Bureau. Professional staff from industry, higher education, and civil society dealing with these matters on a daily basis should be involved in the team's work."

The report also recommends formulating a "broad blockchain training program that will be part of the processes of developing the current and future senior staff in the public and legal sector" and "making the Digital Israel Bureau national venture responsible for devising a systematic multi-year plan for providing private citizens with knowledge about blockchain technology, its advantages and opportunities, and its risks."

The report argues, "The Bank of Israel and its Banking Supervision Department should reconsider the possibility of making it easier for blockchain and cryptocurrency ventures and other players in the cryptographic ecosystem to open a bank account and gain access to banking services, without thereby violating money laundering regulations or any other legal provisions."

"A significant vacuum exists"

The report also says, "The technological and financial architecture of the mechanism for issuing tokens makes it possible to raise capital in relatively short periods of time in a fairly simple and cheap process, with little dependence on financial intermediaries (in comparison with the conventional capital raising alternatives). This provides young ventures with access to global groups of investors that they previously had no chance of reaching. It also makes it possible to promote shared economy ventures with enormous potential, encourage innovation and entrepreneurship, and democratize the capital markets, with their inflexible conventional financial power structures."

Published by Globes, Israel business news - - on November 28, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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