The Israel Securities Authority (ISA) has big plans to regulate the country’s fintech space. As a first step, it is hosting its first ever fintech hackathon next month.
The ISA is looking to attract blockchain-based solutions that can improve the infrastructure supporting the securities and sovereign debt markets in Israel with the hackathon. The securities regulator has partnered with the Ministry of Finance in Israel, Start-Up Nation Central, as well as tech providers like VMware, Digital Asset and Algorand to host the onsite hackathon, which will be held on March 24, 2022, in Tel Aviv.
The hackathon will be led by privacy tech provider and World Economic Forum (WEF) Technology Pioneer QEDIT, which plans to help teams discover and bridge gaps in privacy compliance and regulation.
According to Anat Guetta, chairwoman of the ISA, the blockchain hackathon is part of a larger initiative for the ISA to not only collaborate with professionals in fintech innovation, but to also start gathering the expertise and influence needed to regulate the fintech and the crypto sector more broadly.
An economist and banker with decades of experience, Guetta has been serving as the chairwoman of the ISA since 2018. In 2020, Guetta said distributed ledger technology had the potential to transform Israel’s capital markets.
CoinDesk spoke to Guetta about the ISA’s plans for the hackathon and Israel’s long-term goals for regulating crypto.
The following has been edited for brevity and clarity.
CoinDesk: Why is Israel’s securities regulator hosting a blockchain hackathon?
Guetta: The 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.
How does this hackathon fit into the ISA’s broader plans for crypto?
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.
What blockchain-based fintech solutions will be the focus of this hackathon?
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.
How does Israel’s approach to regulating blockchain and crypto compare to other jurisdictions?
The 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, what should be the most urgent focus of a regulator in establishing oversight in the blockchain space?
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.
How do you see the ISA regulating the crypto space?
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.
I read that in January 2021, a company called Kirobo tried to prove that they were issuing a utility coin but the ISA ruled it was a security. Is this what you mean?
Yes, we have some cases where a token was defined as a security by the ISA, but if we have 14,000 different crypto tokens today and the ability to print a new one almost seamlessly, we cannot use the resources that were provided to us to protect investors to analyze each case. This is why my opinion is that we should have very wide responsibility for this new industry end to end and this is the only way to close the gaps that we have between the point that we should stand on and protect our public and the point that we are standing on today.
When you said crypto assets should broadly be considered as securities, did you also mean cryptocurrencies like bitcoin as well?
I don't want to go into specific examples, but I think that bitcoin is not different from any other. When bitcoin was created in 2009, it was a very small phenomenon before it became what it is today. Many other crypto assets that are active today are on the same path. So I don't differentiate between bitcoin but, as I mentioned, bitcoin is not defined as a security today and to go there, the ISA will have to get the rights and legislation to give us the right powers that we need that we currently do not have.
We 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.
UPDATE (Feb. 14, 14:46 UTC): Adds Start-Up Nation Central and Digital Asset as partners of the hackathon.
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