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Retail_Trading_Status

Allowed-Regulated Unknown
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#20
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Archived
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2025-04-12 06:39
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Executive Summary

Retail trading of cryptocurrencies is allowed in Israel but is regulated under the Supervision of Financial Services (Regulated Financial Services) Law, 2016, with the Capital Market, Insurance and Savings Authority (CMISA) overseeing Virtual Asset Service Providers (VASPs). VASPs require licensing and must comply with strict AML/CFT regulations, including KYC and the Travel Rule following the Prohibition on Money Laundering Order enacted in November 2021. Cryptocurrencies are classified as financial assets and are subject to capital gains tax, and the Bank of Israel issued a directive in May 2022 to guide banks' interactions with crypto-related funds.

Key Pillars

The primary regulator is the Capital Market, Insurance and Savings Authority (CMISA), which licenses and oversees Virtual Asset Service Providers (VASPs). Core compliance requirements include Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations, Know Your Customer (KYC) procedures, and customer due diligence, as mandated by the Prohibition on Money Laundering Order. VASPs must obtain a license from the CMISA to operate legally in Israel.

Landmark Laws

Supervision of Financial Services (Regulated Financial Services) Law, 2016: Establishes the regulatory framework for financial service providers, including those dealing with financial assets like cryptocurrencies, requiring them to obtain a license. Prohibition on Money Laundering Order (effective November 2021): Imposes strict AML/CFT obligations on VASPs, including KYC procedures, customer due diligence, transaction monitoring, record-keeping, and reporting of suspicious activities. Proper Conduct of Banking Business Directive No. 411 (May 2022): Issued by the Bank of Israel, requiring banks to establish risk-based policies for handling funds originating from or destined for virtual currency activities. Income Tax Circular 05/2018: Issued by the Israeli Tax Authority, stipulating that the sale of decentralized payment methods, such as Bitcoin, will be classified as capital income and taxed as capital gains.

Considerations

Cryptocurrencies are classified as "assets" and not currency by the Israel Tax Authority, making them subject to capital gains tax (typically 25% for individuals). The Israel Securities Authority monitors the crypto space, especially regarding Initial Coin Offerings (ICOs) and digital assets that may qualify as securities. The Bank of Israel issued Proper Conduct of Banking Business Directive No. 411, specifying that banks should establish risk-based policies for handling funds originating from virtual currency activities instead of outright refusal. Practical challenges remain, with banks often adopting conservative policies and approving only limited interactions.

Notes

While the Financial Services Law has been in effect since 2016/2018, the issuance of licenses to VASPs began more recently, with only a handful granted by late 2024. The "Travel Rule" is enforced, requiring VASPs to exchange originator and beneficiary information for transactions above a threshold of ILS 5,000. Banks in Israel were initially hesitant to interact with crypto-related funds, leading the Bank of Israel to issue Directive No. 411. The Israel Securities Authority is working on legislative amendments to better define and regulate "digital assets". Profits from selling or exchanging cryptocurrencies are subject to capital gains tax, typically 25% for individuals.

Detailed Explanation

Retail cryptocurrency trading is permitted in Israel, but it's regulated under a framework that classifies cryptocurrencies as "financial assets" rather than legal tender. The Supervision of Financial Services (Regulated Financial Services) Law, 2016, forms the basis for this regulation. Entities providing services related to cryptocurrencies, termed Virtual Asset Service Providers (VASPs) or Digital Asset Service Providers (DASPs), must obtain a license from the Capital Market, Insurance and Savings Authority (CMISA). While the law has been in effect since 2016/2018, licenses have been granted more recently, with only a few issued by late 2024. Strict Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations are in place, aligning with FATF standards. The Prohibition on Money Laundering Order, effective for VASPs since November 2021, mandates Know Your Customer (KYC) procedures, customer due diligence, transaction monitoring, record-keeping, and reporting of suspicious activities to the Israel Money Laundering and Terror Financing Prohibition Authority (IMPA). The Travel Rule, requiring VASPs to exchange originator and beneficiary information for transactions above ILS 5,000, is also enforced. The Bank of Israel (BoI) issued Proper Conduct of Banking Business Directive No. 411 in May 2022, requiring banks to establish risk-based policies for handling funds from virtual currency activities, moving away from blanket refusals. Banks must assess risks based on factors like cryptocurrency type, VASP licensing, and customer activity. The Israel Securities Authority (ISA) monitors the crypto space, especially regarding ICOs and assets potentially qualifying as securities, which would then fall under securities regulations, possibly requiring a prospectus. The Israel Tax Authority (ITA) classifies cryptocurrencies as "assets" for tax purposes, subjecting profits from sales or exchanges to capital gains tax (typically 25% for individuals). Circular 05/2018 and temporary guidelines address the taxation of crypto activities, including mining, which is treated as business income.

Summary Points

**Retail Cryptocurrency Trading Status in Israel: Regulatory Overview**

**I. General Status**

*   **Allowed-Regulated:** Retail trading of cryptocurrencies is permitted in Israel but operates under a defined and evolving regulatory framework.
*   **Classification:** Cryptocurrencies are classified as "financial assets," not legal tender.

**II. Key Regulatory Bodies and Their Roles**

*   **Capital Market, Insurance and Savings Authority (CMISA):**
    *   Licenses and supervises Virtual Asset Service Providers (VASPs)/Digital Asset Service Providers (DASPs).
    *   Ensures consumer protection, financial stability, and compliance.
*   **Israel Money Laundering and Terror Financing Prohibition Authority (IMPA):**
    *   Enforces Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations.
    *   Receives reports of suspicious activities from VASPs.
*   **Bank of Israel (BoI):**
    *   Oversees how traditional banks interact with crypto-related funds.
    *   Issued Directive No. 411 requiring banks to establish risk-based policies for handling funds related to virtual currency activities.
*   **Israel Securities Authority (ISA):**
    *   Monitors the crypto space, particularly concerning Initial Coin Offerings (ICOs) and digital assets that may qualify as securities.
    *   Working on legislative amendments to better define and regulate "digital assets".
*   **Israel Tax Authority (ITA):**
    *   Classifies cryptocurrencies as "assets" for tax purposes.
    *   Provides guidance on the taxation of crypto activities.

**III. Key Legislation and Regulations**

*   **Supervision of Financial Services (Regulated Financial Services) Law, 2016:**
    *   Forms the basis for regulating financial service providers, including those dealing with cryptocurrencies.
*   **Prohibition on Money Laundering Order (Effective Nov 2021 for VASPs):**
    *   Imposes strict AML/CFT requirements on VASPs.
*   **Proper Conduct of Banking Business Directive No. 411 (May 2022):**
    *   Provides guidelines for banks on handling funds related to virtual currencies using a risk-based approach.
*   **Income Tax Circular 05/2018:**
    *   Addresses the taxation of virtual currencies, classifying the sale of decentralized payment methods as capital income subject to capital gains tax.

**IV. Requirements for Compliance (VASPs)**

*   **Licensing:** VASPs must obtain a license from CMISA to operate legally.
*   **AML/CFT Compliance:**
    *   Know Your Customer (KYC) procedures.
    *   Customer due diligence.
    *   Transaction monitoring.
    *   Record-keeping.
    *   Reporting of suspicious activities to IMPA.
    *   Compliance with the "Travel Rule" (exchange originator and beneficiary information for transactions above ILS 5,000).

**V. Notable Restrictions or Limitations**

*   **No Legal Tender Status:** Cryptocurrencies are not considered legal tender.
*   **Bank Hesitancy:** Banks may adopt conservative policies regarding interactions with crypto-related funds, despite BoI guidance.
*   **Securities Regulations:** If a crypto asset is deemed a security, its offering and trading fall under securities regulations, potentially requiring a prospectus.

**VI. Taxation**

*   **Classification:** Cryptocurrencies are classified as "assets" for tax purposes.
*   **Capital Gains Tax:** Profits from selling or exchanging cryptocurrencies are subject to capital gains tax (typically 25% for individuals).
*   **Mining:** Mining is treated as business income.

**VII. Recent Developments or Changes**

*   **Licensing Regime:** Issuance of VASP licenses began more recently, with only a handful granted by late 2024.
*   **BoI Directive:** Issuance of Proper Conduct of Banking Business Directive No. 411 in May 2022, providing guidelines for banks' interaction with crypto-related funds.
*   **Legislative Amendments:** The ISA is working on legislative amendments to better define and regulate "digital assets".
*   **AML/CFT Implementation:** Implementation of AML/CFT rules for VASPs in November 2021, aligning with FATF standards.

Full Analysis Report

Report: Retail Cryptocurrency Trading Status in Israel

Topic: Retail_Trading_Status
Description: Assess whether individual citizens and residents in the country are legally permitted to buy, sell, and hold cryptocurrencies. Detail the regulatory environment surrounding this activity (e.g., KYC/AML requirements imposed on platforms, general warnings issued)

1. Status: Allowed-Regulated

2. Narrative Explanation:

Retail trading of cryptocurrencies (also referred to as virtual currencies or digital assets) is permitted for individual citizens and residents in Israel, but it operates within a defined and evolving regulatory framework. Israel does not consider cryptocurrencies to be legal tender or equivalent to fiat currency, but rather classifies them as "financial assets" under the Supervision of Financial Services (Regulated Financial Services) Law, 2016 [2, 4, 18]. This classification subjects them to specific regulations, primarily focused on Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT), consumer protection, and taxation [2, 4, 10].

Key aspects of the regulatory environment include:

  • Licensing of Service Providers: Entities providing services related to financial assets, including cryptocurrencies (such as exchanges, custodians, brokers), are considered Virtual Asset Service Providers (VASPs) or Digital Asset Service Providers (DASPs). These entities must obtain a license from the Capital Market, Insurance and Savings Authority (CMISA) to operate legally in Israel [2, 4, 7, 10, 11]. This licensing regime, established under the 2016 Financial Services Law, aims to ensure consumer protection, financial stability, and compliance [4, 7]. While the law has been in effect since 2016/2018, the issuance of licenses began more recently, with only a handful granted by late 2024 [2, 4, 9].
  • AML/CFT Regulations: Israel has implemented robust AML/CFT rules applicable to VASPs, aligning with international standards set by the Financial Action Task Force (FATF) [4, 8, 14]. The Prohibition on Money Laundering Order, which came into effect for VASPs in November 2021, mandates strict Know Your Customer (KYC) procedures, customer due diligence, transaction monitoring, record-keeping, and reporting of suspicious activities to the Israel Money Laundering and Terror Financing Prohibition Authority (IMPA) [4, 6, 8, 14]. The "Travel Rule" requiring VASPs to exchange originator and beneficiary information for transactions above a certain threshold (ILS 5,000) is also enforced [8, 11].
  • Bank Interaction: The Bank of Israel (BoI) plays a role in overseeing how traditional banks interact with crypto-related funds. While banks were initially hesitant, the BoI issued Proper Conduct of Banking Business Directive No. 411 in May 2022. This directive requires banks to establish risk-based policies for handling funds originating from or destined for virtual currency activities, rather than imposing a blanket refusal [2, 3, 13, 15, 17]. Banks are expected to assess risks based on factors like the type of cryptocurrency, the VASP involved (particularly if licensed), and customer activity [3]. However, practical challenges remain, with banks often adopting conservative policies and approving only limited interactions [3].
  • Securities Regulation: The Israel Securities Authority (ISA) monitors the crypto space, particularly concerning Initial Coin Offerings (ICOs) and digital assets that may qualify as securities under Israeli law. If a crypto asset is deemed a security, its offering and trading fall under securities regulations, potentially requiring a prospectus unless offered only to accredited investors [2, 4, 5, 20]. The ISA is also working on legislative amendments to better define and regulate "digital assets" [4].
  • Taxation: The Israel Tax Authority (ITA) classifies cryptocurrencies as "assets" for tax purposes, not currency [2, 10, 18, 19]. Profits from selling or exchanging cryptocurrencies are subject to capital gains tax (typically 25% for individuals) [2, 3, 18]. Specific circulars (like 05/2018) and temporary guidelines address the taxation of crypto activities, including mining (treated as business income) and mechanisms for paying taxes derived from crypto gains [2, 3, 4, 18].

In summary, individuals in Israel can legally engage in retail cryptocurrency trading. However, the activity is regulated, primarily through the licensing and AML/CFT supervision of VASPs, specific directives governing bank interactions, potential application of securities laws, and clear taxation rules. Regulators continue to monitor the market and refine the framework [2, 4, 17, 20].

3. Supporting Excerpts:

  • On Legality and Classification: "In Israel, individuals are permitted to exchange cryptocurrency for the local fiat currency (NIS)... In Israel, cryptocurrencies are not treated as “money” or given otherwise equal status as domestic or foreign fiat currency. In 2018, the Israel Tax Authority (“ITA”) issued Circular 5/2018 stating that virtual currencies are considered “assets” and not currency... virtual currencies being included among [financial assets]." (Global Legal Insights, Oct 2024) [2]
  • On Regulation and Licensing: "Under Israeli law, cryptocurrencies are considered “financial assets” and are subject to regulation. The Financial Services Law is the primary legislation that regulates financial service providers, including those dealing with financial assets and virtual currencies... This law requires entities engaged in providing services for... financial assets, including cryptocurrencies, to obtain a licence." (Global Legal Insights, Oct 2024) [2] "Therefore, crypto-oriented companies in Israel must obtain a service provider licence from the Capital Market Authority." (Global Legal Insights, Oct 2024) [2] "In 2016, Israel formally addressed cryptocurrencies by requiring brokers and custodians of virtual currencies to obtain a license issued and supervised by the Capital Market, Insurance, and Savings Authority (CMA) under the Supervision of Financial Services (Regulated Financial Services) Law." (Legal 500, 2024) [4]
  • On AML/CFT Requirements: "In November 2021, Israel implemented an anti-money laundering (AML) order aligning with FATF standards. The Israel Money Laundering and Terror Financing Prohibition Authority leads these efforts, imposing strict know-your-customer (KYC) requirements and reporting obligations." (Legal 500, 2024) [4] "The order imposes the following main obligations on financial service providers in virtual currencies: identifying and recognizing a customer, monitoring and reporting to the Anti-Money Laundering Authority about cross-platform activity and application of the “Travel Rule”..." (Herzog Fox & Neeman via Mondaq, Nov 2021) [8] "In Israel, Virtual Asset Service Providers (VASPs) must register with the Capital Markets, Insurance, and Savings Authority (CMISA) under the Financial Services Control Law. To operate legally, businesses must comply with stringent anti-money laundering (AML) and counter-terrorist financing (CTF) regulations..." (Scorechain, 2025) [11]
  • On Banking Interaction: "Subsequently, in May 2022, the Supervisor of Banks released the Proper Conduct of Banking Business Directive No. 411... The Directive provides guidelines for risk assessment and establishes policies and procedures for transferring funds involving digital assets using a risk-based approach." (Global Legal Insights, Oct 2024) [2] "For the first time, the BOI officially ordered that banks operating in Israel will not automatically refuse to provide services related to funds related to crypto currencies." (Chambers and Partners, Jun 2024) [3]
  • On Taxation: "The Israeli Tax Authority addressed the taxation of virtual currencies through Income Tax Circular 05/2018... This circular stipulates that the sale of decentralized payment methods, such as Bitcoin, will be classified as capital income and taxed as capital gains." (Legal 500, 2024) [4]
  • On Trading Permissibility: "There are no prohibitions on the use or trading of cryptoassets in Israel. Cryptoasset trading is common and is regulated under the existing financial services regulations​." (Legal 500, 2024) [4]

4. Source URLs:

  • [2] Global Legal Insights - Blockchain & Cryptocurrency Laws & Regulations 2025 | Israel: https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/israel (Accessed via search results)
  • [3] Chambers and Partners - Blockchain 2024 - Israel | Global Practice Guides: https://practiceguides.chambers.com/practice-guides/blockchain-2024/israel (Accessed via search results)
  • [4] Legal 500 - Israel: Blockchain - Country Comparative Guides 2024: https://www.legal500.com/guides/chapter/israel-blockchain/ (Accessed via search results)
  • [6] Arctic Intelligence - AML/CTF compliance in Israel: https://arctic-intelligence.com/aml-ctf-compliance-in-israel/ (Accessed via search results)
  • [7] GFIN - Israel Capital Markets, Insurance & Savings Authority (CMISA): https://www.gfin.net/members/israel-capital-markets-insurance-savings-authority-cmisa (Accessed via search results)
  • [8] Herzog Fox & Neeman via Mondaq - AML and Cryptocurrencies in Israel (Nov 2021): https://www.mondaq.com/israel/fin-tech/1134624/aml-and-cryptocurrencies-in-israel (Accessed via search results)
  • [10] Eli Shimony Law Office - Exploring Cryptocurrency Regulation in Israel: https://eshimony-law.com/en/exploring-cryptocurrency-regulation-in-israel-key-insights-for-investors/ (Accessed via search results)
  • [11] Scorechain - Israel Crypto Regulations 2025: https://www.scorechain.com/israel-crypto-regulations-2025/ (Accessed via search results)
  • [14] Cointelegraph - Israel reportedly adopts new AML rules for crypto (Nov 2021): https://cointelegraph.com/news/israel-reportedly-adopts-new-aml-rules-for-crypto (Accessed via search results)
  • [17] Gov.il - Digital Asset Regulation Israel Ministry of Finance (Nov 2022): https://www.gov.il/en/departments/publications/reports/digital-asset-regulation-recommendations-report (Accessed via search results)
  • [18] Freeman Law - Israel - Cryptocurrency Laws and Regulation: https://freemanlaw.com/israel-cryptocurrency-laws-and-regulation/ (Accessed via search results)
  • [20] Library of Congress - Regulatory Approaches to Cryptoassets: Israel: https://www.loc.gov/law/help/cryptoassets/israel.php (Accessed via search results)

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