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3,800 employees across 174 companies: the Web 3.0 industry aims to become the driving force of high-tech.

Israeli crypto enterprises are urging legislators and policymakers to amend local regulations to enable the industry's expansion, global operations, and increased hiring. However, a recent survey by the industry forum reveals that a third of the startups are contemplating relocation

Yoel Tzafrir, in collaboration with ICBW3. 03 September 2023

In the photo (from right to left): Eldad Rodrig, Omri Donio, Youval Rouach (Bits of Gold). Mark Samargon, Oren Rosenfeld (Fuse). Ronen Windichansky (Collider). Michael Heisenberg (Aleph Foundation). Noa Mashiach (Israeli Bitcoin Association). Aviad Ben Horin (Chainalysis). Nir Hirshman (Crypto, Blockchain, and Web 3.0 Companies Forum). Meiren Shtibel (FireBlocks). Shauli Rejwan (Masterkey, crypto companies forum). Yoav Shpieller (Blox) | Photography: Yael Tzur

Barely a week goes by without another report highlighting the current tough times in the high-tech industry. This downturn, noticeable since late 2021 and worsening in 2022, stems from several factors: rising interest rates, the conflict in Ukraine, and other global crises. Israeli high-tech, primarily powered by international venture capital, hasn't yet seen the recovery that's beginning to emerge globally. Against this backdrop, it's fascinating to see the blockchain and crypto sector—rich in technology—experiencing consistent growth, increasingly attracting development engineers and programmers.


A status report by KPMG for the Crypto, Blockchain, and Web 3.0 Companies Forum reveals that Israel is home to 174 crypto-related companies. These firms span ten different areas, ranging from risk management, digital wallets, and payments, to blockchain development, tokenization, credit, loans, and investments. This includes lesser-known fields like "decentralized autonomous organizations" (DAOs)—entities that provide tools for managing DAOs with principles of open source, collective decision-making, and full transparency. These companies employ 3,800 people and have raised $3.85 billion for their operations from 2013 to 2023. Currently, ten venture capital funds are active in this space.

Nir Hirshman and Shauli Rejwan
Nir Hirshman and Shauli Rejwan | Photography: Yael Tzur

Despite its growth trajectory, Israel's industry still lags behind the global average, potentially missing out on the vast opportunities present worldwide. 'We're facing a somewhat absurd situation,' comments Nir Hirshman, CEO of the Crypto, Blockchain, and Web 3.0 Companies Forum (ICBW3). 'Israel is hamstrung by heavy regulatory barriers unique to it, unlike anything seen elsewhere. The Israeli market's full potential is far from realized. Without a sweeping regulatory overhaul, we risk losing many of our brightest minds.

Banking and taxation barriers

The primary obstacles hampering the growth of Israel's crypto industry are, first and foremost, banking barriers. Leaders within the forum argue that banks impose irrational difficulties on companies within the sector, effectively hindering their operations. A detailed study involving several dozen top executives and decision-makers from related companies revealed that 80% of these businesses suffered losses due to the banks' actions. Seventy percent encountered challenges with bank transfers, and 79% faced hurdles when trying to open accounts, a situation deemed unacceptable. Moreover, 75% were indirectly told their funds originating from crypto would not be accepted, while 66% were advised to ensure their accounts had no links to crypto activities. The implications are alarming: 33% of startups are contemplating or have decided to leave Israel, and 24% have resolved not to hire any more employees within the country.


'The damage to companies spans multiple systems,' according to forum representatives. 'This starts with the depositing or transferring of funds, where 63% of managers reported banks imposed preconditions. Even tax payments aren't spared—36% faced difficulties making payments through banks. Worse, 20% incurred fines, interest, or foreclosures due to tax payment delays caused by banking practices.'


The issue of taxation further exacerbates these challenges. Crypto companies, raising capital through digital currencies, find themselves at a disadvantage compared to other high-tech firms. Both the Securities and Tax Authorities overlook this disparity, denying crypto companies the same exemptions afforded to their high-tech counterparts. For instance, while high-tech entities might pay 25%-28% in taxes on options, crypto companies are taxed at 50% for raising funds in tokens—a significant discrepancy. A legislative proposal by Knesset members Dan Iluz, Aral Kellner, and Simcha Rothman aims to address this by exempting non-residents from capital gains taxes on digital currency sales and equalizing the tax relief on employee options to include digital currencies. 'We seek not preferential treatment, but parity with our peers,' stress the forum's leaders.


So, how are these companies managing under such conditions? The study sheds light on this question too, revealing that 67% of executives resort to alternative or roundabout methods to carry out their firms’ financial operations in Israel. Naturally, this is far from an ideal solution; resorting to such methods incurs significant additional costs for the companies.

Yet, there are silver linings amidst the challenges. Despite the hurdles, about 56% of industry managers remain hopeful, believing in a positive shift for the industry in the foreseeable future.

"Expose the regulators to the enormous potential of the industry"

The Crypto, Blockchain, and Web 3.0 Companies Forum—an organization partnered with the industry's leading entities—was founded with a definitive mission: to nurture and expand the industry within Israel, eliminate bias against the crypto and blockchain sectors, and halt the exodus of intellectual capital, talent, and entrepreneurs from the country.


The Crypto, Blockchain, and Web 3.0 Companies Forum is a collective of leading figures in the industry, partnering with major players like Aleph, Starkware, Fireblocks, Bits of Gold, Blox, Collider Ventures, Dcentralab, Fuse, Jelorida, Bit2c, Braavos, Masterkey VC, and the Israeli Bitcoin Association.

These companies stand as paragons of Israeli high-tech innovation, a fact their founders take great pride in. For instance, Fireblocks is renowned for developing the world's premier security solution, enabling institutional entities to securely manage digital currencies. Starkware is making significant strides in advancing blockchain technology globally, boasting a valuation of eight billion dollars—a testament to its impact and potential. Starkware isn't alone in achieving unicorn status within this dynamic field; it's joined by another company of similar valuation, underscoring the sector's vibrancy and potential for growth. Notably, Starkware was initiated by an academic researcher, highlighting the academic roots behind some of these technological breakthroughs. Another noteworthy mention is Zengo, a leader in wallet technology, pioneering in biometric identification systems. These examples unmistakably showcase the brilliance and innovative spirit of Israel's technological research and development.

How and why was the forum established and how is it different from the Bitcoin Association?

In 2021, my co-founder Shauli Rejwan and I successfully campaigned to eliminate a government proposal from the Settlements Law that would have mandated cryptocurrency holders to disclose their assets," shares Nir Hirshman. "This led us to bring industry representatives to the Knesset, where we recognized the necessity for an organization dedicated to advocating for the industry's interests. This organization would not only champion the industry's cause but also tackle research, image, and legal challenges it faces. We foresaw the approach of 'winter storms'—problematic legislation from the Securities Authority among other hurdles. After discussions with the Bitcoin Association and its founder, Manny Rosenfeld, known as the 'father of Bitcoin in Israel,' we decided they would focus on community building while we addressed regulatory issues. We united ten founders who all committed to collaborate and support our cause.

"Our aim is to furnish policymakers with a comprehensive and current database, enabling them to make well-informed decisions and to enlighten regulators about the significant potential of this industry in Israel. While government processes tend to be slow, the high-tech sector demands rapid action and continual innovation to prevent other countries from overtaking us."


Shauli Rejwan, aside from being a co-founder of the forum, serves on its board of directors and management team. A CPA, entrepreneur, and venture capital investor by profession, Rajvan believes, "We created the forum from a dire need within the industry, which teeters on the brink of despair. Some companies, faced with uncertainty and regulatory support, have already severed ties and left the country. Such instability severely impacts businesses, compounded by fluctuating regulations making it challenging to discern permissible actions at any given time. The forum was structured akin to a high-tech team, aiming to forge connections with legislators and regulators. We engage with each authority tailored to its specific regulatory domain—including the Tax Authority, the Capital Market Authority, the Supervisor of Banks, and the Chief Economist at the Treasury.

The state has a paramount interest in fostering the growth of the industry

On July 25, 2023, the inaugural crypto, blockchain, and Web 3.0 lobby meeting took place in the Knesset, spearheaded by MK Dan Iloz (Likud) and Oded Forer (Israel Beitenu). The lobby's creation aimed to showcase the growth potential of Israeli firms in the sector and to push for regulatory reforms to facilitate industry development, positioning it as a key driver of Israeli high-tech expansion. The forum projects the industry could potentially create 5,000-10,000 new jobs in the coming years and urges the Knesset and government to support its growth.


The forum underlines the critical interest the state has in the industry's growth. For Israeli companies to operate globally, hire staff, and contribute taxes and profits domestically, sweeping regulatory reforms are essential. Without these changes, companies risk losing their competitive edge internationally and may relocate. Legislators are called upon to prompt regulators to update banking and tax regulations accordingly. "Viewing this solely through a narrow lens misses the bigger picture. This is a global industry on an upward trajectory, currently employing around 30,000 programmers. It's a technology that's reshaping the world and heralding a new digital age," stress Hirschman and Rejoan. They highlight the significance of Web 3.0, noting Israel's pivotal role in developing the first internet generation's infrastructure and questioning why Israelis shouldn't lead in the next digital evolution.


The forum's data on Israel's industrial activity aligns with global trends, showing a crypto industry market value exceeding $100 billion, with $23 billion raised in capital in 2022 alone. Major international players like Nike, IBM, Starbucks, Gucci, and Wikipedia have ventured into crypto.


The past decade has seen a global trend towards widespread adoption of digital financial assets, especially Bitcoin, used for payments, investment assets, and tokens that drive distributed computing systems. The demand for cryptographic assets continues to grow, with over 15 million active wallets worldwide at the start of 2023. Despite market volatility, DeFi exchanges process transactions worth over $100 billion monthly.

"Let innovation thrive"

Discussing crypto inevitably brings up significant challenges facing the industry globally, with numerous entities embroiled in legal difficulties, some accused of defrauding investors, and others collapsing entirely. However, Israeli crypto companies stress that their focus diverges from speculative cryptocurrency trading. They are at the forefront of developing sophisticated financial technologies that facilitate verified value transfers across distributed blockchain infrastructures, emphasizing the symbiotic relationship between academia and the industry. They highlight the potential for generating a myriad of economic services through blockchain layers like Ethereum, utilizing open source. "The potential is enormous, and we risk missing out," company leaders caution.


Internationally, regulatory landscapes are evolving. In the United States, a bipartisan bill proposed by Senators Gillibrand and Loomis aims to regulate the sector, although current approaches lean towards enforcement, with the SEC pursuing lawsuits rather than establishing modern, adapted regulations. Conversely, Europe and the UK are advancing institutional legislation supportive of the industry's growth. The EU's forthcoming MiCA regulation is designed to protect consumers and investors while bolstering financial stability without stifling innovation in crypto and Web 3.0. This framework will regulate digital assets underpinned by blockchain technology and distributed ledgers.


The UK, aiming to cement its status as a global financial hub, is aligned with Prime Minister Rishi Sunak's objectives. Michael Eisenberg of Aleph Fund highlights Britain's agile advantage, similar to Israel's, where swift state action can foster a conducive economic environment for investors and firms. "This is precisely what Israel needs: clear regulations and guidelines to foster innovation," the forum asserts.


The competitive global race to establish a crypto-friendly business and regulatory environment is underscored by initiatives like Miami's ambition to become a global crypto hub, attracting innovative startups that transform family businesses into substantial enterprises. The movement for regulation in the US, echoed by Robert F. Kennedy's campaign, and similar momentum in Europe, signals a pivotal moment. "If we don't advance, we'll miss out," the forum warns.


Israel possesses the requisite talent, human capital, and unparalleled creativity to excel but faces significant hurdles today. Entrepreneurs, instead of focusing on application development, grapple with legal challenges. The forum argues that there should be no disparity between crypto entrepreneurs and those in cyber or medical fields regarding benefits, taxation equality, and banking access. The industry has the potential to expand exponentially but only within a supportive business and regulatory climate.

In collaboration with ICBW3.


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