The Israeli financial regulator Israeli Security Authority (ISA) was set up in August 2017 to determine the applicability of Israeli securities law to ICOs and cryptocurrencies.
Headed by ISA Chief Economist Gitit Gur-Gershgoren, the committee studied all these cryptocurrency projects and reviewed the existing laws in different countries. Fostering a harbor for technological innovation as well as protection of investor rights were the other goals of this effort. Once the research was completed, they prepared an interim report to ISA chairperson Anat Guetta who will take a call on the proceedings with regulations for ICOs
Here are some key points and definition made in the report:
According to them, they distinguish between the coin used as a means of exchange and a token.
A token as per the translation by the Globes is defined as a “special cryptocurrency conferring rights in a specific venture.”
The token is divided into 2 sub categories:
- Security Token
- Utility Token
“A security token is a token that confers ownership rights, participation, or membership in a specific venture, or rights to future cash flow from such a venture.” Any token that has even one characterstic of that of the traditional security like a share or bond will be considered a security.
“A utility token is a token that confers usage rights in a product or service offered by a specific venture.”
The recommendations
Some of the recommendations include that cryptocurrencies should be categorized into a token or security according to the characterstics and circumstances of each law. Consequently the respective law should preside over that particular case.
According to the committee, A cryptocurrency will not be recognized as a security if
- “It will 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.”
- “Cryptocurrencies implying a right to a product or service, which are purchased solely for consumption and use, shall not be considered securities.”
(Personal opinion – I feel this is the clincher) : “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.”
I may be wrong but I think it means that if you cant use it for that said utility at that point of time and you are able to trade it, it is a security. No prizes for guessing how many tokens may become securities that way !
On ICOs
With respect to their views on ICOs, one of the recommendation includes a “lenient regulation for ICOs on a limited scale”.
They also see the need for tailoring the securities law to better serve the complexity involved in an ICO. They feel that ICOs should be determined on a case to case basis.
While this is a major step taken by the Israeli authorities, it is clear that there is not going to be a global consensus on how ICOs will be legalized. Not only because of the complexity of ICOs in general, it depends on the dynamics of the nation as well. Each authority will view ICOs & tokens from their own lens. Some countries like China, South Korea have chosen to ban it outright. Some countries have welcomed ICOs like Belarus, Switzerland etc. Others like India etc have still maintained their silence on ICOs and are watching with caution. From that perspective, It is laudable that the report seeks to maintain that balance between protection of investor rights and provision of a space for blockchain products to thrive.
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