Israel’s Capital Market, Insurance and Savings Authority has published new binding guidelines that will significantly tighten regulation of the country’s digital asset market, requiring licensed crypto service providers to comply with stricter oversight measures within six months.
The reform, considered one of the most significant moves taken in Israel’s crypto sector to date, is intended to strengthen protections for customer funds, reduce risks from cyberattacks, operational failures and company collapses, and bring Israel’s market closer to international regulatory standards.
The move comes after the Bank of Israel published a draft directive last week aimed at easing the deposit of crypto-related funds into the banking system. Under the central bank’s proposal, funds originating from crypto activity and transferred through a licensed entity under the Capital Market Authority would be considered lower risk, potentially making it easier to deposit them into Israeli banks.
One of the main changes introduced by the Capital Market Authority concerns minimum capital requirements. A company providing crypto services without holding customer assets will be required to maintain equity capital of at least NIS 2 million. A company that also provides custody services will be required to maintain equity capital of at least NIS 2.5 million.
In addition, custody providers will be required to maintain additional capital equal to 0.25% of the total value of customer assets held in custody. As the scope of activity increases, the capital requirements will rise accordingly.
The authority also determined that equity capital may not be invested in digital currencies. It will only be allowed to be held in cash, bank deposits or short-term government bonds, ensuring that companies have liquid resources available to meet their obligations in the event of a crisis.
Full separation of customer assets
The new framework provides, for the first time, detailed regulation of customer asset custody. Companies will be required to maintain a complete separation between customer assets and company assets and will not be permitted to use customer holdings for any purpose unrelated to providing the service.
The assets will be held in designated accounts, meaning that even in the event of insolvency, company creditors will not be able to claim them.
Digital wallet management will also become subject to stricter requirements. Any transfer of digital currencies, particularly between hot and cold wallets, will require approval from several designated officials and will be carried out through Multi-Signature mechanisms and advanced security measures.
In addition, every company will be required to maintain a daily record of customer assets, provide a personal account area where each customer can view their holdings at any time, and ensure that assets can be withdrawn within a reasonable period even during system overloads or cyberattacks.
The guidelines also require a significant strengthening of internal oversight mechanisms. Each company will appoint a dedicated officer responsible for safeguarding customer assets who is not a member of the board of directors and will be required to conduct regular reviews.
Companies providing custody services will additionally be required to undergo quarterly audits by an independent external accountant.
The use of foreign custodians has also been addressed under the new rules. Israeli companies will be permitted to use international custody providers only if those entities operate under recognized regulation, such as the UK’s FCA authority or the European Union’s MiCA regulatory framework.
Even in such cases, responsibility will remain with the Israeli company, which will be required to conduct daily monitoring of assets and provide customers with full disclosure regarding the identity of the custodian and the legal framework governing it.
Broad regulatory advance
The reform is part of a series of regulatory steps being advanced by Israeli authorities in recent months. Alongside the Bank of Israel’s draft guidelines, the government is also promoting legislation to regulate stablecoins and grant the Capital Market Authority supervisory powers in that field.
For investors, the main significance of the changes is an increased level of protection for assets held by regulated entities. The separation of customer assets, capital requirements, security mechanisms and new oversight procedures are designed to reduce the risk of events such as platform collapses or loss of assets, similar to incidents seen in global crypto markets in recent years.
At the same time, the new requirements are expected to increase operating costs for companies and make it more difficult for new players to enter the market.
However, the Capital Market Authority believes that, in the long term, the measures are necessary to strengthen public confidence, enable the development of a safer and more regulated crypto market, and bring Israel closer to the regulatory standards used in leading countries around the world.