Israel: A Friendly Blockchain Hub, but Is Government Policy Lacking?

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It has been almost a decade since Dan Senor and Saul Singer penned “Start-Up Nation,” their ode to the Israeli tech sector. The book, which chronicles much of Israel’s success as a small but potent innovation force that spans countless industries, highlights the immense technological knowhow and seemingly fearless energy that supports the country’s thriving startup culture. Nearly a decade later, Israel has not missed a beat in terms of capitalizing on the biggest trends in technology

From cybersecurity to artificial intelligence and machine learning, Israel’s legion of innovators is tackling problematic areas felt in numerous sectors with its own brand of expertise, helping this geographical blip build a global footprint. Blockchain and distributed ledger technology (DLT) perfectly align with these ambitions, helping Israel emerge as one of the leading launchpads for the industry. While Bitcoin’s (BTC) price has risen and fallen over the years, one constant has been the upward growth trajectory of worldwide as well as Israeli blockchain initiatives.

Leveraging blockchain’s beneficial attributes

While the 2018 rout in crypto prices and the crumbling initial coin offering, or ICO, market certainly affected the momentum of blockchain in Israel, the industry has shown no signs of slowing in the time since. While difficult to pin down exact statistics regarding how many companies are currently operational in the space, estimates from 2018 compiled by the Israel Blockchain Association put the figure at over 200 companies. 

Though some have come and gone in the time since, the firms are keenly focused on developing and expanding upon blockchain’s multifaceted potential in areas like fintech and cybersecurity. According to a statement to Cointelegraph from Avishay Ovadia, principal at Collider Ventures, the technology can be leveraged extensively:

“A major part of why Israel has been known as the startup nation is because of our cyber and fintech technologies, which are also connected to our army intelligence service. In a way, I think that Blockchain and crypto are weaved technologies with fintech and cyber. Their core is to protect value, prevent attacks, and deliver a better financial system.”

Most importantly, the supportive environment for the startup economy is also helping the industry realize its ambitions. This welcoming platform has attracted the interest of many noteworthy projects and ambitious initiatives, including Libracamp’s virtual bootcamp for Libra developers.

Granted, the Libra project faces many hurdles, especially winning over the hearts and minds of governments across the globe. However, Libracamp remains undaunted by the politics and instead is forging ahead with leveraging the Libra testnet. 

Related: How Facebook Libra Has Been Influencing Crypto, Politics and Finance

Another noteworthy project is INX Crypto and Derivatives, which is planning an initial public offering-like crowdfunding round for its trading platform in the United States. The company plans to raise $130 million by selling INX tokens, marking the first time a blockchain company has filed with the U.S. Securities and Exchange Commission (SEC) to launch a compliant security token sale. 

In addition to high-profile projects, a component of Israel’s advances in the blockchain arena is support from the government itself, vis-à-vis regulation and legal judgments. Regulators and local authorities have made noteworthy attempts to stay in front of the industry, albeit with mixed results.

Back in May, the court system affirmed the Israel Tax Authority’s classification of Bitcoin as an asset rather than a currency, clarifying its taxable status. However, there are many who believe this ruling could be subject to change, especially as Bitcoin’s use in everyday transactions gains momentum to the point at which it is just as fungible as ordinary currency.

Still, despite the progress in this area and even regulatory support from the Israel Securities Authority for a local security token issuance platform, the absence of a more proactive government approach to cryptocurrency and blockchain is causing headaches among the entrepreneurial community. Addressing the government’s role in the industry, Israel Bitcoin Association Chairman Meni Rosenfeld noted in a conversation with Cointelegraph: 

“It seems that they are trying to help, but not very successfully. Positive encouragement activities are few, and heavy slow-moving regulation is a hindrance.”

Blockchain growth no match for government bureaucracy

Despite Israel being a promising destination for crypto capital, bureaucracy remains a major impediment stymieing businesses and investors alike. Although it has a friendly face, the country makes it difficult to open new businesses, even for entrepreneurs in the tech sector. Layers of bureaucracy, complicated taxation and more make Israel one of the least friendly places to do business. Ari Achiaz, the managing director of the Hogeg Blockchain Research Institute at Tel Aviv University, believes that: 

“Anyone that has undergone the bureaucracy channels in Israel knows that there is plentiful waste of time and money. Therefore, blockchain technology can potentially reshape the services civilians and businesses receive in Israel. However, I expect strong headwinds from powerful workers’ unions in Israel that view any small change as a threat, not to mention a technology that could make things substantially more efficient. Sadly, bureaucracy will probably be the last adopter of this technology.”

According to the Doing Business 2019 report compiled by the World Bank, Israel ranks 49th out of 190 on the ease of doing business index. However, its overall score belies certain areas of difficulty for businesses like paying taxes, with Israel’s rank being 90th out of 190. Another area is enforcing contracts, for which Israel again ranks 90th.

Due to its cold relations with neighboring countries, one could assume the Israeli government would readily and eagerly facilitate the export economy and trade, but that is not the case. In this vital area, Israel ranks 64th on the list. 

For blockchain and DLT, these high hurdles raise the cost of doing business and make it very difficult to remain compliant in the eyes of the law, so much so that many companies build businesses offshore to overcome these significant challenges. Other countries, like Estonia, which have made opening a licensed and complaint blockchain-based business much more affordable, are attracting Israeli companies in droves. Although very supportive of the industry and its momentum, Rosenfeld observed that: 

“I don’t think blockchains can streamline bureaucracy in the government, at least not without a fundamental change in what ‘government’ means which is decades away. What it can do is facilitate innovation by allowing more ways to bypass government bureaucracy and challenging it to adapt more quickly to the new era.”

Though the same report cited Israel for progress in the areas of information transparency and administrative efficiency during 2017 and 2018, the difficult regulatory environment for the country’s budding fintech and blockchain operations is anything but efficient or transparent.

The fact that a special fast-track initiative is being undertaken by the government to clear a backlog of more than 2,000 applications highlights just one tangible problem the industry faces. Meanwhile, for cryptocurrency investors, the local regulatory climate is even more complicated — at the very least, for those 70,000 Israelis that must navigate taxes owed on cryptocurrency investments. 

With no banks accepting funds that originated from cryptocurrency, many of these investors cannot use crypto gains or even move their fiat funds from exchanges to bank accounts to pay their taxes. Further complicating the situation is the fact that no local banks will facilitate the accompanying fiat transactions. The Israel Bitcoin Association is petitioning the court to have the Bank of Israel disclose its reasons for refusing transactions, but this is likely to be a drawn-out battle for transparency.

These complications are not solely borne by investors, but also the businesses operating in the ecosystem. Enterprises that need to move funds or access working capital are categorically denied entry to the local banking system and a gateway to ordinary financial channels.

While this is not the defining factor for Israeli startups engaging in more traditional equity fundraising, it makes a compelling argument for offshoring companies instead of keeping them onshore amid the confluence of regulatory uncertainty and lack of open financial channels. Guy Armoni, the current strategy manager at cryptocurrency tax consultancy Bittax, opined in a conversation with Cointelegraph:

“Banks today face many challenges with digital currencies being just one of them. To some extent, bitcoin has managed to challenge traditional banking as we know it, but I do not think that this is the only reason why banks are blocking the gateways to companies and individuals engaged in the blockchain ecosystem. Regulatory uncertainty can expose banks to risks that they do not yet have the tools to assess or deal with. I believe that private companies will overcome the difficulties and come up with solutions that will allow bridging between the various parties. In any case, the rigidity of the banking system is a reminder of the power of the Banking Monopoly that can afford to put itself ahead of its customers.”

More hope than hinderance

Necessity is the mother of all invention, and no other country adequately captures the essence of that phrase quite like Israel. Whether faced by political, economic or geographical restrictions, Israeli entrepreneurs seem to constantly overcome the odds when it comes to innovation. 

This ethos also extends to blockchain and its associated businesses, in which Israel remains one of the pioneering forces driving the industry momentum. Assuredly, there are challenges associated with working in the local ecosystem. Ovadia concluded:

“I think that in terms of decentralized innovation, Israel is losing amazing entrepreneurs every day, but on the other hand, because Israel is a very small market, on day one, startups know to look towards the US, European, and Asian markets, so Israeli innovation will be available abroad but maybe not embedded here.”

Yet, there is no denying the promising projects within its borders and the expert human capital that is dedicated to making blockchain more accessible and to pushing widespread adoption.