Bank of Israel: We Want to Help Blockchain Companies

A plethora of topics were discussed but, as we don’t want to waste too much of your time, we’ll only be outlining the key highlights of the conference. So for those of you who were too cheap or lazy to attend, and without further ado, here are four key takeaways from the Israel Blockchain Summit.

Israel is making a name for itself in the blockchain field

Just as Israelis have played an outsize role in developing the retail trading industry, the inhabitants of this small Middle Eastern nation are punching way above their weight in the blockchain industry.

Research by cryptocurrency intelligence firm One Alpha, which was presented at the conference by the company’s CEO Yaniv Feldman, indicates that there are now 140 blockchain companies in Israel.

Those firms have managed to raise a grand total of $1.3 billion since their founding. On top of this, cash raised via initial-coin-offerings (ICOs) looks set to increase significantly this year. In 2017, Israeli firms raised $586 million via ICOs. That’s compared to $606 million in just the first nine months of 2018.

To put those figures in context, ICOs have raised around $20 billion across the globe in 2018 to date. That means Israel, a country with 0.11 percent of the world’s population, was responsible for 3 percent of all cash raised via ICOs – an impressive number.

Regulators are getting on board

The number of firms raising money through ICOs in Israel may also be set to increase with help from financial authorities. Two regulators spoke at the summit and both seemed very positive about working with blockchain firms.

“We want to create policies that help blockchain companies,” said Michael Asulin, Director of Encouragement Laws at the Israeli tax authority. “The reason for this is simple – we want these businesses to stay in Israel.”

Designing that regulation may, according to Asulin, take some time. Rather pragmatically, the regulator emphasised that, as blockchain is a new technology, Israeli authorities have to get a better understanding of how things work before they start amending the law books.

“You can’t legislate for newborn technology,” said Asulin. “We have been working with the industry to see what we can do – figuring out how to regulate security tokens for instance. But we have to see how everything works first and then we can start regulating.”

On a separate panel was Daniel Hahiashivili – the Bank of Israel’s Head of Innovation and Technology. Less sanguine than Asulin, Hahiashvili’s appearance still indicated that the country’s central bank is taking blockchain technology very seriously.

He noted that things had changed dramatically since a statement made five years ago by Karnit Flug, the governor of the Bank of Israel, that insinuated banks should stay away from cryptocurrency.

“We’re still in the patch where you have to be very careful when managing risk,” said Hahiashvili. “But on the other hand, we have now organised a team that will convene regularly and  discuss regulatory issues – like what should the barriers be, what are the implications for the market and liquidity.”

KYC is a stumbling block that must be overcome

One problem that Hahiashvili did not mention that cropped up throughout the day was know-your-customer (KYC) rules. In some shape or form, almost every speaker acknowledged that they had some problems with KYC, anti-money laundering (AML) and anti-terrorism laws.

“The number one problem for the [blockchain] ecosystem is KYC,” said Simplex CEO Nimrod Lehavi.

Many cryptocurrency fans will be familiar with the current, piecemeal KYC processes put in place by blockchain firms up until now. But according to most of the participants at the summit, companies will have to move away from scanning passports and webcam pictures if blockchain is to get institutional adaptation.

“KYC and AML regulations in Europe have changed massively, from a minor fine to a multi-million dollar penalty,” noted Lehavi. “So even for a million dollar profit, banks would rather skip taking such a huge risk on KYC for such a profit.”

This isn’t a dot.com bubble

One speech that will likely have warmed the hearts of the blockchain industry members in attendance came from Roy Saar – a partner at venture capital firm, Mangrove Capital Partners.

Saar argued that we are not in the midst of a dot.com-esc bubble. He justified this line of argument by noting that interest in, and the purchase of, cryptocurrency has largely been confined to a fairly small group of people.

On top of this, Saar pointed out that, amongst those holding cryptocurrency, the levels of cash involved are substantially lower. The dot.com bubble caused stocks to lose $5 trillion in value – blockchain firms have the potential to lose about 1 percent of that amount.

Having said all of this, Saar did then point out that, even if it is not a dot.com-size bubble, the blockchain industry could still be in a bubble.

In order to avoid that scenario, Saar argued, they must ensure they have strong due diligence procedures in place. Outside of that, Saar added that regulators must also put laws in place so that firms have standards to meet and investors can feel more confident about putting their cash into a company.

It’s not over yet

Despite a huge downturn in cryptocurrency trading volumes and a slump in searches for ‘bitcoin’ and ‘ethereum’, the blockchain industry isn’t going to come crashing down any time soon.

Aside from the above takeaways, perhaps the biggest move we are seeing in the blockchain industry – and the summit provided evidence of this – is a sorting of the wheat from the chaff. The wide-boys and scammers are still here but are starting to disappear. Meanwhile, the legitimate firms are solidifying their position with regulatory licenses and institutional acceptance.

So yes, the frenzy we saw at the start of this year which drove the price of bitcoin to more than $20,000 is over but that doesn’t mean the industry is crashing to it’s death – rather it’s coming back down to reality.