Israel Fintech Regulation Part I
Fintech is a significant and very interesting sector in the Israeli high-tech industry. Interestingly, of the 500 Israeli Fintech companies, only 10% offer services locally, with the rest focusing solely on the international market. This is partly because the Israeli market is relatively small yet is also partly due to many regulatory complexities. It is clearly in the public’s interest that successful Fintech companies should also offer services locally. This is understood by Israeli financial regulators, however, since they are primarily concerned with investor protection, they tend to be reluctant to allow new and innovative products to reach the retail market. The best way for regulators to catch up with technological advancement is through legislation; indeed, Israeli regulators have recently been promoting new laws and initiatives for the Israeli Fintech industry.
For example, the Israel Securities Authority promoted a legislative amendment to the existing Securities Law in order to regulate securities crowdfunding platforms. In addition, the Israeli Knesset approved a fourth amendment to the Supervision of Financial Services Law, which regulates the activities of Peer to Peer (P2P) lending. Furthermore, the Israeli Ministry of Finance and Ministry of Justice are establishing a regulatory sandbox that will allow Fintech start-ups to test their products on the Israeli market, with minimal legal requirements, and without having to undergo a full and lengthy licensing process.
For Fintech companies looking or hoping to work in Israel, these regulatory developments could either serve as an opportunity or as a barrier and should be carefully considered. To provide further information, Start-Up Nation Central has asked former Head of Enforcement at the Israeli Securities Authority Dr. Zvi Gabbay, partner and head of the Capital Markets Department at Barnea, to provide an overview of the Israeli Fintech regulatory situation:
Israeli Fintech Regulation
Over the past decade, emerging technologies have attracted new players in the financial industry. Start-ups and technology-based financial service providers have begun challenging the traditional industry, broadening the scope of financial services and decreasing their price through innovative, groundbreaking technologies.
Fintech combines technology and finance, referring to technological innovations in the world of financial services. It is these innovations that are making financial services more efficient, personal, and secure.
There are four main areas of fintech development:
- Mobile technology offers easy and accessible payments, provides almost three billion unbanked people with affordable access to financial services, and increases economic growth.
- Big Data enables companies to bundle the information on the web to better understand their customers and to provide them with customized services.
- Artificial Intelligence enables companies to use the raw data gathered from Big Data to create a system of decisions that analyze risks.
- Blockchain technologies manage and ensure safer trading by reducing intermediary intervention through “smart contracts”, with the potential to dramatically change the financial industry as we know it.
However, technological innovation moves a lot faster than regulatory developments. Despite this, Israeli regulators are trying to catch up, and their efforts show real results. While these results do not solve all the problems, and there is still room for improvement, the Israeli financial regulators comprehend the importance of regulatory certainty. It is their aim to achieve greater certainty by promoting legislative amendments and implementing regulations for all major aspects of Fintech innovation: offering of financial technological products, addressing relevant anti-money laundering challenges, and enabling mass offerings of securities. Israel’s courts have also become involved, ruling on several related cases, including in the banking field.
In order to establish a digital bank in Israel, an entrepreneur must follow the Banking Supervision Department instructions. The main requirements include:
- A minimum of 50 million NIS in shareholders’ equity (reflecting a significant reduction, achieved by an important regulatory development)
- A license application.
Applying for a license is a five-step process, and the length of examination of each step can take up to several months. A special permit, granted by the Governor of the Bank of Israel, is required to be a controlling shareholder of a digital bank.
The Supervision of Financial Services (Regulated Financial Services) Law provides for regulation of the financial services industry. Currently, in order to provide P2P services and credit services, one must apply for the relevant license and submit to regulatory supervision.
As of October 2018, in order to provide cryptocurrency exchange services and digital wallets, the sponsor must apply for a Financial Asset Service Provider’s license and submit to the supervision of the Israeli financial regulator responsible for regulating these services.
The Securities Law prohibits offering securities trading services through a trading system operated by a non-licensed entity (i.e. a system not managed by a stock exchange licensed to operate in Israel). According to the Securities Law, entities that wish to offer securities trading services through a trading system must apply for a license or a special permit, to be granted by the Chairman of the Israel Securities Authority.
The Israel Securities Authority, the supervising authority for digital coins, is currently working on drafting appropriate regulation for digital currencies, in order to regulate this industry. In the meantime, banks in Israel are imposing many difficulties for businesses associated with digital currencies and ancillary services. There have been several instances in which banks refused to open bank accounts or make transfers/deposits where the money stemmed from digital currency transactions. Fortunately, in some of the cases, the courts intervened, and compelled the banks to provide their clients with these fundamental banking services.
The regulatory legislation mentioned above, together with many other initiatives being developed by Israeli regulators, provide at least some degree of regulatory certainty, and is intended to strike the right balance between enabling technological innovation, and simultaneously protecting the interests of the investing public. Hopefully, over time, the Israeli regulators will catch up with Israeli Fintech innovators and convert the Israeli financial market into a primary location for regulated Fintech service providers.
Dr. Zvi Gabbay, Partner and the Head of the Capital Markets Department, Barnea
Dr. Zvi Gabbay is a partner and the head of the Capital Markets Department at Barnea. Prior to this, Dr. Gabbay servedas the Head of Enforcement and a member of management at the Israel Securities Authority (ISA). Dr. Gabbay is anexpert in the fields of financial regulation and securities enforcement, both in Israel and the United States. Dr. Gabbay advises corporate clients on operations relating to capital markets, corporate and securities law, and financial regulation.