“Regulators are lagging behind when it comes to technology”—Israel Securities Authority’s Chair

Introduction

The Israel Securities Authority (ISA) has revealed plans to regulate the country’s fintech space, according to a report by CoinDesk on 14 February 14 2022. As part of the plans, the ISA will be hosting its first ever fintech hackathon in March, 2022.

The ISA aims at using the hackathon to attract blockchain-based solutions for the improvement of the infrastructure for supporting the securities and sovereign debt markets in Israel with. The hackathon which is scheduled to take place on 24 March 2022 in Tel Aviv has the Ministry of Finance in Israel, Start-Up Nation Central, and tech providers like VMware, Digital Asset and Algorand, as partners with the ISA.

The privacy tech provider and World Economic Forum (WEF) Technology Pioneer QEDIT, will be leading the hackathon, with the aim to “help teams discover and bridge gaps in privacy compliance and regulation.”

Anat Guetta, the Chair of the ISA, said that the blockchain hackathon is “part of a larger initiative for the ISA”, for two main reasons; first, to collaborate with professionals in fintech innovation, and second, to start gathering the expertise and influence needed to regulate the fintech and the crypto sector more broadly. This clearly shows the securities regulator’s intentionality in fulfilling its role in the industry.

Guetta is an economist and banker with many years of experience, and has been serving as the Chair of the ISA for over three years now. Guetta believes that distributed ledger technology has the potential to transform Israel’s capital markets, as she stated sometimes in 2020.

In an exclusive interview with CoinDesk, Guetta spoke about the ISA’s plans for the hackathon and the country’s long-term goals for regulating crypto. The interview is summarized below.

The ISA’s reason for hosting a blockchain hackathon

According to Guetta, “[t]he ISA is now the leading fintech regulator in Israel, and the hackathon is part of the activities that it is leading as part of this role. The main motivation behind the hackathon is to facilitate the transfer of technology from a developmental environment to applications in a large-scale live environment that may bring to light various technological, business and regulatory issues. We hope to integrate novel technologies to Israel’s existing capital market infrastructures, and we believe the ISA’s steps will encourage other regulators in the country to promote projects involving new technologies.

“We also expect the hackathon to serve as a catalyst for effective and high-standard collaboration between various actors in Israel’s financial system. The hackathon will serve as a meeting site between the ISA and developers, technology firms and academic scholars. Bringing together the teams of these technology providers will create an opportunity for regulators and for other stakeholders to gain in-depth technical knowledge on global fintech developments. This is also the first fintech focused hackathon to be organized by Israeli regulators.” she added.

How the proposed hackathon fits into the ISA’s broader plans for crypto

On this, the ISA Chair said, “I must say that first of all, regulators are lagging behind when it comes to technology. It was always a fact, and it will be so also in the future. We are not so advanced, and we do not have the risk appetite that the industry has. We are here to balance and to monitor and to supervise. We see crypto and blockchain as two separate phenomena. We see great potential for blockchain technology. Crypto activity is a separate issue that we are examining and considering how it should be supervised in a holistic way in Israel, as it should be in other areas in the world.”

On what particular blockchain-based fintech solutions the hackathon focuses on

“The first thing that the hackathon will examine is the issuance of securities and government bonds. Different asset types like stocks and bonds have different issuance requirements, sometimes involving several different parties like brokers. It means that the originators of an asset do not usually have a direct channel to investors and buyers, which complicates the processes. This experiment will educate us about other innovative ways to lead issuances of securities and government using blockchain in the future.”

Comparing Israel’s approach to regulating blockchain and crypto compared to other jurisdictions

When asked about what makes Israel’s approach unique from others, Guetta surprisingly stated that, “[t]he ISA is part of the IOSCO organization, which is the association for securities regulators worldwide. It’s part of the main committees that are active on blockchain and crypto. My regulatory approach is that because Israel is not the biggest country in the world, because we are a very small and smart country, we don’t have to reinvent the wheel each time that regulatory needs come up. I believe that the right way for Israel is what we call the passporting attitude. It means that we would accept an entity that has a current license from regulators that are accepted by the ISA. I believe that we will have to learn the state-of-the-art regulations by watching regulatory updates worldwide and learn how to adopt the rules for Israel.”

Looking beyond the hackathon, the most urgent focus of "a regulator" in establishing oversight in the blockchain space—according to Guetta—is control.

“At the end of the day, our aim is to get the power that we need in order to supervise and to build this new market for new participants because we understand that regulation, as in many other fields, is the license to do business. Blockchain producers, creators or marketers need regulation in order to have a clear idea of what is permissible. We see the statistics. We see that most blockchain companies are not operating in Israel. They prefer to operate outside of Israel. I think that we’re losing them as an economy and as a country. We need very precise and clear laws in order to bring them back here. And we should create the conditions to let them work from Israel in a legitimate and acceptable way. So, our higher mission is to get the right powers in order to enable this.” said Guetta.

How the ISA looks at regulating the crypto space

The ISA Chair also said, “I believe that crypto needs a holistic regulatory framework in Israel that will cover the industry end to end. We’re looking very closely at what the U.S. and its Securities and Exchange Commission (SEC) are doing.

“I think that the nuances that regulators are trying to find between different types of crypto assets is wrong. I think that we should take crypto as a whole and implement regulatory supervision on it because, otherwise, technology is smarter than us. Regulators did not notice when the initial coin offering craze started in early 2018. Today we have very sophisticated issuances of crypto that are not exactly securities like stablecoins or utility coins. We should take a very wide definition of crypto and have authorities supervise it. I think that this is the right direction.

“The nuances between securities and crypto are not very clear. We cannot always define them using our legal tools. I think that, in the end, securities regulators should adopt crypto as a security regardless of its format without going into details. The public is exposed, and we cannot protect investors and consumers in the way that they should be protected from the crypto phenomenon. Opportunities are also going away because we cannot define what is eligible and what is not eligible in our market. So, this is the endgame that we should aspire to.”

When asked whether cryptocurrencies like bitcoin should also be considered as securities, like other crypto assets, the Chair said that to her, bitcoin is not different from any other crypto assets, and concluded that, “[w]e have to wake up and understand that there is no real difference between crypto and securities and we have to unify the definitions in order to protect consumers and investors, and to make this industry legitimate.”

Key takeaways from the ISA’s plans to regulate crypto

 

  1. Regulators are lagging behind when it comes to technology. They need to study and understand. They should also partner with the experts and experienced players in the industry to get it right.
  2. We don’t have to reinvent the wheel each time that regulatory needs come up. For ISA, they, “accept an entity that has a current license from regulators that are accepted by the ISA.”
  3. The aim of regulation is to get the power that the regulator needs in order to supervise and to build the market for new participants because regulation  affects the market either positively or negatively, depending on the approach adopted.
  4. Crypto needs a holistic regulatory framework. There needs to be clarity. Many countries are not yet certain about which approach to adopt, how to clafisy crypto, and so on.
  5. Opportunities are also going away from countries that cannot define “what is” and “what is not” about the market.

Israel as a nation has always taken the lead globally, in technology and innovation. In the blockchain and crypto space, although it is not among the first countries to have, or be regulating the industry, their current approach appears to be promising and would serve as a model for other countries to follow, especially those who are yet to take a clear stance regarding cryptocurrencies in particular.