Tel Aviv Stock Exchange Regulates Crypto Trading

Non-Banking Members will Allow their Customers to Transact in Cryptocurrency in a recent development of the Israeli capital market that aims to encourage innovation and competition, while mitigating the risks and protecting the customers

February 27, 2023 - The Tel-Aviv Stock Exchange announced a draft for public comments for approval of the expansion of the authorized activities of Non-Banking Members (NBMs) to include trading in Cryptocurrency.

Following recent market turmoil in the cryptocurrency market and growing demand from customers to transfer money originating in this activity into their accounts, regulated institutions are now taking closer interest in this sector.

The rapid development of the Cryptocurrency sector over the recent years now exrequires regulation that will mitigate the various risks (operational, legal, cyber and other) that are inherent in Cryptocurrency activity.

Protection of the Customers as an Intrinsic Component of the Structure of Activity

The proposed structure will enable the customer to deposit money (Fiat money) that are designated for investment in crypto currency and withdraw monies originating from those currencies in the following manner: the NBM will contact two functions - the first, a licensed provider of Cryptocurrency trading services, and the second, a licensed provider of custodial services for those currencies. In order to purchase the Crypto currency, the customer will deposit in its account with the NBM monies in traditional currency (NIS or foreign currency) (Fiat money) that will be deposited in an omnibus account of the NBM with the provider of the trading services (similarly to the activity in foreign securities). Upon receiving an order to buy Cryptocurrency from the customer, the purchase will be executed using the money deposited in the omnibus account, as mentioned above, and will be recorded in the customer's account with the NBM. When the customer gives an order to sell the Cryptocurrency, the provider of trading services will sell the coins and credit the NBM's omnibus account by the amount of consideration (Fiat money) received and thereafter the consideration will be transferred into the customer's account with the NBM.

Regulation in Israel

The report, "Regulation of the Digital Assets Sector - Roadmap to a Policy", published by the Chief Economist in the Ministry of Finance this last November, as part of a large-scale study involving all financial regulators, including the Israel Securities Authority, the Capital Market Authority and the Bank of Israel, indicates that the current regulatory approach in Israel, and in certain other countries, is to impose regulation on financial activities or services in digital assets similarly to that currently applied to non-digital assets, taking into consideration the non-traditional and unique characteristics of this sector.

Global Regulation

The regulation and supervision of Cryptocurrency service providers are still in the making. International authorities recommend a State regulation that will apply global standards and guidelines also to the digital currency sector, as reflected in the requirements of the Financial Action Task Force (FATF) and the recommendations of the International Monetary Fund. Centralized processes for the regulation of this activity in the United States and in the European Union are in various stages of progress.

In the State of New York, regulation over virtual currencies has already been instituted in 2015, and service providers in those currencies are supervised by the New York State Department of Financial Services. The NYDFS imposes specialized stringent regulation on institutions operating in the sector, which are required to apply for a dedicated license to operate ("BitLicense"). As part of the regulation, the NYDFS publishes a public list of Cryptocurrencies that are authorized for activity by licensed institutions.

The TASE staff prioritizes the regulation and advancement of the trading in Cryptocurrency as a means to upgrading the Israeli capital market in line with international standards, as well the ability of NBMs to expand their areas of activity and the ability of their customers to trade in Cryptocurrency. TASE believes that the alignment of local regulation with international regulation will attract more foreign investments and foreign investors into the Israeli market, while at the same time will enable the Israeli public to invest locally, through supervised institutions. This move will facilitate the development and advancement of the Israeli capital market and encourage innovation and competition, while addressing the risks that are inherent in this activity. Within this framework, TASE proposes an amendment to the TASE Rules that will permit NBMs to allow their customers to transact in Cryptocurrency.

A proposal for public comments on this issue was posted this morning on TASE's MAYA system. Upon receipt of comments from the public, the proposal will be submitted for approval by the TASE Board of Directors.