The vibrant Israeli fintech industry generates innovation using Blockchain technology which leaves the regulator no choice but eventually to join in. Special Counsel Roy Keidar examines the development and the current state of Blockchain in Israel.

The military factor

Despite its small size, Israel, long recognized as a hotspot for disruptive innovation, is becoming a leading force in Blockchain technologies. The flourishing Israeli tech ecosystem, boasting the highest concentration of tech companies outside of Silicon Valley, provides fertile ground for pushing DLT forward.

One of the biggest proponents for this is the fact that cyber security and cryptography play a key role in the Israeli defense establishment, and the military serves as a potent incubator for these fields. The current climate is reminiscent of the development of the cyber industry in the early 2000's.

A vibrant profit-driven private sector coupled with passionate and talented entrepreneurs, sees an early influx of capital. This, in turn, attracts the attention of the government which utilizes its regulatory and institutional powers to allow for an increase in capital, both financial and human, including the establishment of relevant supportive institutions, incentivizing academia, and generating a substantial amount of buzz.

Research and development

Israeli universities are home to a number of Blockchain research pioneers, including Turing Award winner Professor Adi Shamir of the Weizman Institute of Science and Prof. Eli Ben-Sasson of the Technion.

In the private sector, as per a recent report by the global consulting firm Deloitte, there are dozens of Israeli startups developing a wide-range of Blockchain technologies, in various sectors including security, hardware, virtual currency, payments, P2P and social platforms.

For example, a startup offering a Blockchain solution to eliminate the need for documents in international shipping agreements, an application for secure and validated purchase and storing of goods online, and another creating Blockchain data templates for use by banks and enterprises.

Regulator’s dilemma

While the Israeli Blockchain eco-system is vibrant, the Israeli regulator is still 'sitting on the fence'. Given that future uses of Blockchain technology, and its various implications, are unpredictable, this is to be expected.

Regulators worldwide remain suspicious of virtual coins for enabling individuals to circumvent banks and government authorities.

The Silk Road and Mt. Gox scandals certainly did not lend any additional credence to the enterprise. But beyond understandable concern for criminal misuse and consumer protection, it is clear that resistance may be more deeply rooted: any decentralized alternative to centuries-old systems of centralized governance and control is not something any regulator can swallow too easily.

Public and private

In this way Israel is somewhat unique. Due to the small size of the Israeli industry, there is constant friction between the private and public sectors. This leads to an unlikely type of interaction between the two, and oftentimes creates an almost unavoidable, albeit sometimes wary, alliance.

This is something we are currently witnessing generally in the burgeoning fintech industry. Regulation of the banking sector, particularly conservative, and often slow-moving, now finds itself faced with the need to adjust to hundreds of start-ups operating in almost every financial sector, including payments, trading, lending, anti-fraud, and insurance, offering relatively simple solutions to complex financial problems.

Regulating the decentralized

Together they generate an 'Israeli fintech hybrid' that is slowly and rapidly transforming the industry.

Thus, the regulator now finds itself poised at a crossroads. The pressure is on to learn to adapt to these new technologies, with an aim to encourage and support them.

The concern of regulating "too much" or "too early" is salient. But the real question seems to be not when or to what extent, but rather how. How do you regulate decentralized network?

In the meantime, the vibrant Israeli industry will likely continue to generate innovation using Blockchain technology, eventually leaving the regulator no choice but to join in, which if done correctly, will likely give a huge boost to the Israeli industry.