The amendments would define digital assets as digital representations of value that are used for investment and can be transferred using distributed ledger. Digital assets would be classified as "financial instruments" under Israeli securities law. 

The Israel Securities Authority has invited the public to provide feedback on its proposal. Deadline for comments is 12 February 2023.

It concluded that DLT could help advance the Israeli capital market.

"Assimilating the technology may reduce trading costs to end customers, reduce systemic risks to the economy, create a technological environment that encourages financial innovation, and open the capital market to classes of companies such as SMEs, which previously refrained from financing their operations by participating in the public capital market. In view of the technology’s capability to rapidly, efficiently, and reliably validate and reconcile information for multiple parties simultaneously, the Committee believes that the greatest potential benefit of DLT applications for the capital market will come from infrastructures for issuance, registration, and settlement," the report said.

The ISA invited local and international business entrepreneurs and technology providers to show it their technological innovation, which would help it assess the capabilities of their initiatives and in identifying obstacles that might impede the development of digital markets in Israel.

The committee made the following recommendations: 

• Tailor made disclosure regime: disclosure requirements should be adapted to the unique features of the activity of these companies, based, among other things, on the experience that the ISA will accumulate as entrepreneurs considering an issuance of cryptoassets would approach the ISA, and learn from the experience of other regulators.

• Easing of restrictions through a regulatory sandbox: the ISA is a member of an inter-ministerial committee that recently recommended the establishment of a customized regulatory environment for firms that employ new technologies to offer financial products and services. We recommend allowing the use of this framework, when established, to experiment with the issuance of cryptoassets and to provide guidance to entrepreneurs in this field.

• Regulatory infrastructure for security token trading platform: adjustments to existing regulation should be considered, to create a regulatory infrastructure that is more suitable for the activity of this industry and optimally addresses the specific risks that the industry represents.

The committee also recommended to consider applying a model similar to the one adopted for crowdfunding regulation for projects involving cryptoassets that are deemed securities. 

The report's recommendations are as follows:

1. "A cryptocurrency will be deemed a security according to the totality of the circumstances and features of each case, taking into account the purposes of the law.
2. Cryptocurrencies that confer rights similar to the rights conferred by traditional securities such as shares, bonds, or participation units, will be deemed securities.
3. As a general rule, cryptocurrencies that are designed to be used exclusively as a medium of payment, clearing, or exchange and are not limited to a specific venture; that do not confer additional rights; and are not controlled by a central entity — will not be deemed securities.
4. In general, cryptocurrencies that represent a right to a product or service and are acquired solely for the purpose of consumption and use will not be deemed securities. In this regard, the relevant test is the actual purpose of the acquisition. Therefore, if the token cannot be used when it is issued or if it can be traded on a secondary market, these may be indications that its acquisition was made for investment rather than for consumption purposes.
5. The use and extension of specific existing and future capital raising tracks for ICOs should be considered, including an examination of the following issues: lenient regulation for small-scale ICOs; raising capital through ICOs on crowdfunding platforms; defining a provisional framework for ICOs pilots, in the form of a regulatory sandbox, including oversight of the cryptocurrency developers, and; examining the option of relying on foreign regulation that applies to cryptocurrencies.
6. If ICOs are conducted on the basis of prospectuses, the disclosure requirements defined in the Securities Law must be adjusted to the unique features of this field, in line with adjustments made in the past to other areas of operations (such as real estate, gas and oil, and biomed).
7. Whether an ICO constitutes an offer of securities to the Israeli public will be determined according to the features of the offer. An offer will not be deemed a public offer in Israel if its features clearly show that it does not target the Israeli public, (based on the language of the offer, and an absence of marketing and advertising activities targeting investors in Israel). The committee invites a discussion on whether the current tests should be adjusted to the decentralized and cross-territorial nature of ICOs."

The report distinguished between a cryptocurrency used as a means of exchange and a token, which is defined as a "special cryptocurrency conferring rights".

With respect to tokens, the ISA also distinguished between a security or investment token, which "confers ownership rights, participation, or membership in a specific venture, or rights to future cash flow from such a venture", and a utility token, which "confers usage rights in a product or service offered by a specific venture".

The ISA recommended that tokens should be evaluated on a case-by-case basis, but those that mimic conventional securities, such as bonds, will be considered securities.

"A cryptocurrency shall be considered a security according to the array of circumstances and characteristics of each case, taking into consideration the purpose of the law. Cryptocurrencies conferring rights similar to those of conventional securities, such as shares, bonds, or participation units, shall be considered securities."

However, a utility token that confers a right to buy a product or service will not generally be considered securities.

"As a rule, cryptocurrencies designed solely for payment, clearing or exchange, other than a specific venture, which do not confer additional rights and are not controlled by a central entity, shall not be considered securities," the report said.

The ISA also recommended "lenient regulation for ICOs", the option of raising capital through cryptocurrencies on crowdfunding platforms, the creation of a regulatory sandbox as well as the possibility of relying on "foreign regulation applying to cryptocurrencies".

Tokens are also split into security tokens and investment tokens.

The report, which took six months to put together, is now with the ISA's chair, who will decide on the next steps.