The Evolution of Cryptocurrency Regulation in Israel Prior to 2024

Israel’s approach to cryptocurrency regulation before 2024 was multifaceted, encompassing taxation, banking, licensing, and anti-money laundering measures. The Israel Tax Authority (ITA) issued several circulars between 2018 and 2021, clarifying the taxation of digital assets. Virtual currencies were classified as assets, subjecting their sale and exchange to a capital gains tax of 25%. Additionally, the sale of non-fungible tokens (NFTs) was deemed a taxable event​​.

The Bank of Israel, in 2021, directed banks to accept cryptocurrency deposits from licensed currency trading corporations, facilitating the conversion of cryptocurrency to fiat currency in bank accounts. Subsequently, the Israeli Banks Supervisor released Directive No. 411 in May 2022, outlining risk assessment guidelines and policies for transferring funds involving digital assets​​.

Under the Financial Services Law, entities providing services in financial assets, including cryptocurrencies, were required to obtain a financial service provider license. This law was enforced by the Capital Market Authority, with only a few crypto-oriented companies securing the license by 2022. The law also mandated the implementation of anti-money laundering (AML) and counter-terrorism financing (CTF) measures by these service providers​​.

The Israel Securities Authority (ISA) intended to create a regulatory sandbox for blockchain-based projects, although it was not implemented as of 2022. This initiative aimed to facilitate the issuance and trading of tokens, potentially categorized as security tokens, under specific reporting and risk-mitigation measures​​.

Investment advisors and fund managers dealing in cryptocurrencies in Israel were subject to specific licensing requirements set by the ISA. These requirements were designed to safeguard investors’ interests and ensure that those managing cryptocurrency investments had the necessary expertise and complied with AML regulations​​.

While there was no legal requirement for digital assets to be held by a custodian, institutional investors were required to retain assets, including cryptocurrencies, under custodial care. The Capital Market Authority issued a draft circular in 2022 concerning the safeguarding of financial assets, including cryptocurrencies, necessitating that service providers have the skills and technology to securely manage these assets​​.

Cryptocurrency mining in Israel was neither explicitly permitted nor prohibited, but it was considered a business activity and therefore subject to corporate income tax​​.

Regarding border regulations, Israeli law did not impose restrictions or declaration obligations on cryptocurrency holdings. However, the legal framework for the importation of cryptoassets and the applicability of VAT remained unclear​​.

Virtual currency transactions were not regulated by specific legal prohibitions in Israel as they were not classified as conventional cash under the legal framework. This distinction left virtual currency transactions largely unregulated by any specific legal limitations​​.

In estate planning and testamentary succession, the treatment of cryptocurrencies lacked specific regulatory guidelines and was governed by the general civil laws under the provisions of the Succession Law​​.

In summary, Israel’s legislative landscape for cryptocurrencies prior to 2024 was characterized by evolving taxation policies, progressive banking regulations, stringent licensing requirements, and a focus on anti-money laundering measures. However, certain areas like the regulatory sandbox, border regulations, and estate planning for digital assets remained underdeveloped or unclear.