Regulatory barriers
In Israel, like in many other countries, token fundraising process has been hindered due to regulatory uncertainty in regards to ICOs. Regulation direction, as well as current stand, are still unclear in terms of the ability of blockchain tech startups to raise funds from Israeli citizens, as well as the ways in which cryptocurrency holdings will be taxed in the future. This is the reason behind many Israeli-based companies incorporating in Malta, Gibraltar, Switzerland and other crypto-friendly locations, as well as limiting ICO participation to Israelis unless they are accredited investors.
Israel already acquired reputation as a crypto and blockchain powerhouse globally, but the certainly for the industry is thoroughly lacking.
The Israel Security Authority has declared cryptocurrencies as not securities, but are other an asset, taxable by the capital gains as properties, in addition to banning crypto-related companies from the Tel Aviv Stock Exchange indices, which is a stand similar to many other countries that aren’t considered crypto-friendly.
I believe that soon the regulation will emerge with clear path and direction toward blockchain and crypto, and there are indications of regulators looking favorably on this market, taking into consideration the emerging industry perspective – as with any new industry, blockchain and crypto have uncertainties and risk, but carry a lot of potential for the Israeli economy.
If this indeed will be the case, it may lead to the growth of a new market favorable to crypto and create an aspect of a Blockchain and Crypto nation for Israel, which has been known as a Startup Nation for decades due to a highest percentage of NASDAQ listings for Israeli companies after those from the US and Canada, as well as the highest number of startups per capita in the world. Israel had a head start on the ICO fundraising launching successful blockchain projects such as Bancor, one of the first major ICOs, raising over $150 million in just a few minutes.
Banking hold ups
The viewpoint of the Israeli banks is that cryptocurrencies have a high risk for money laundering and terrorist financing activities. As a result, most banks have been refraining from engaging in the cryptocurrency market on a commercial as well as retail level. This has negatively impacted Israeli startups under the ICO process as they are required to seek banking services abroad.
Israeli banks dabbled in blockchain systems, including Israel’s second largest bank, Bank Hapoalim, which created a blockchain-powered platform together with Microsoft to handle signups of guarantors for the bank’s clients.
In December of last year, Israel’s Central Bank, the Bank of Israel, sided with Bank Leumi, which refused service to Bits of Gold, Bitcoin and Ethereum broker, because of Bitcoin’s inability to meet anti-money laundering standards.
Cryptocurrency brokers and exchanges complying with the country’s regulation are regarded as lawful even though Israel’s central bank, the Bank of Israel, initially labeled exchanges as “websites that facilitate gambling transactions.”
Any form of support governmentally
Israeli authorities are said to plan the launch its own state-backed cryptocurrency. Both the Israeli Finance Ministry and Central Bank are considering the move, and, if approved by the Israeli Knesset, this could become a reality.
Every year, the Israeli government-operated Chief Scientist office provides R&D grants to startups that adhere to a certain set of criteria. Blockchain startups, fitting the criteria for the grant, seem to be eligible to apply.
Support from Investors and Enterprises
There are many new crypto and blockchain funds from all over the world, such as Benson Oak, which committed $100 million for investment in Israeli blockchain startups (source).
Large enterprises, such as IBM and Microsoft, are adding resources helping startups flourish in the Israeli ecosystem. In addition, companies like ConsenSys, founded by Ethereum early investors and founders, are setting up offices in Israel to take advantage of the blockchain nation’s entrepreneurial and technological acumen. IOTA, IoT-focused Blockchain solution, recently opened an office in Tel Aviv as well.
Cyber-security risks including malicious activity
Trading platforms and third-party service providers may be vulnerable to hacking or other malicious activities. While the Bitcoin Network is decentralized, there is increasing evidence of concentration by creating of “mining pools” and other techniques, which may increase the risk that one or several actors could control the Bitcoin Network or other similar Blockchain.
Recently, hackers had raided one of Bancor online wallets to the tune of $23.5 million. (Source)
The robbery at Bancor is just the latest example of crooks targeting digital token companies. In January, Ernst & Young reported that roughly 10% of all funds, or over $400 million, raised through Initial Coin Offerings have been lost to hackers.