2023-07-07 06:35:08
The crypto companies in Israel managed to promote a bill in their favor that passed in preliminary reading, which may discriminate favorably against the rest of the companies in the economy. The offer may attract capital to Israel which will benefit the Israeli crypto companies. But this relief could harm Israel in the future, in view of a global trend to tighten the rules that apply to the field, while Israel is busy providing relief.
The bill submitted by Knesset member Dan Iluz (Likud), together with Knesset members Ariel Kellner of Likud and Simcha Rothman of religious Zionism, is intended to grant exceptional preference to crypto companies, in the form of a tax exemption, or a reduced tax. It won the support of the Ministerial Committee for Legislation at the beginning of the week, and was approved on Wednesday evening, in the presence of a small number of Knesset members, when stormy demonstrations were held outside the Mishkan on the subject of legal reform, and difficult security incidents during the IDF’s operation in Jenin. 15 Knesset members supported the proposal, including two from the opposition. , and two objected.
Unlike normal companies, where there are tax exemptions or reduced tax rates on investment in companies, here the companies request a tax exemption on profits from the sale of their product, which is crypto-currencies that the companies can ‘create out of thin air’, without any connection to real economic activity. If the law is passed, the crypto companies will also be exempt from tax like any other company that accepts foreign investments or distributes options to its employees and to these will be added additional reliefs in the event that the company distributes crypto currencies to employees, or sells them to foreign investors.
Deliberate confusion between investing in a company and purchasing its product
Knesset member Iloz, who previously worked at the Kehalat Forum, presented his bill in the Knesset plenum as follows: “Today there are 3,800 employees in the field of crypto in Israel, about 174 companies that have raised about NIS 3.85 billion. But instead of making it easier for them so that more companies will develop and come, the state Israel is currently only making it difficult, in many areas. It is difficult for them to open bank accounts, it is difficult for them to raise money. The legal situation in the country in the State of Israel does not fit the new situation in the world.”
According to Iloz, “My bill is a first and small step. It seeks to compare the situation of the crypto companies to other companies in the high-tech field, on two issues. It is customary in the crypto companies to give options. Just as options are given in the high-tech companies, so the crypto companies give them instead of shares – in currencies. And investors are also usually given coins instead of shares. But the existing law does not recognize this situation, it actually creates discrimination against the crypto companies.”
Iloz ignores the fact that the choice of crypto companies not to issue shares to foreign investors or to distribute options to employees is their decision alone, which derives distinctly from considerations of circumventing the supervision of the issuance of shares and the rules of trading in securities. Foreign investors and employees who wish to redeem shares of a crypto company will be required to act according to the accepted rules, unlike the case where they try to resell crypto coins they received from the company. According to the narrative of the crypto companies, the Israeli law must be bent to make it easier to invest in them, but in practice, it is not at all about investment in the company in accordance with Israeli law, except for tax breaks regarding Product use From their products – digital currencies that they issued.
The government supports, although they have not yet legally defined what crypto-currencies are
The Deputy Minister of Finance, Michal Waldiger (Religious Zionism), presented the decision of the Ministerial Committee for Legislation to support the law in preliminary reading, subject to the fact that further legislative procedures will be promoted in coordination with the Minister of Finance. The reason for the government’s support, according to Waldiger, is that last February the government already accepted a decision initiated by the Treasury to promote regulation of “digital assets”, as part of a package of decisions made around the Settlements Law.
Waldiger noted that the government’s decision also included a “clear definition of digital assets”, which is required in order to supervise them. Currently, the government does not have such a definition, and a team at the Ministry of Finance is still formulating it. “The work on the legislative memoranda has not yet been completed, therefore at this stage it is impossible to establish an adequate definition of what a digital asset is. The team will submit its recommendations to the minister by the end of December 2023.” As a result, the government’s support for the proposal was limited to the preliminary reading only, with the continuation of the legislation being done in coordination with the Minister of Finance
MK Karib objected: “Distortion of the tax system on income from work”
Member of Knesset Gilad Karib (Labor), claimed the opposition was discriminated against, that it is necessary to wait for government legislation when the government initiates a law on the same subject, while here the government promoted support for a preliminary reading.
However, MK Karib also opposed the proposal because of its content: “There is a lot of logic in the proposal, where digital assets are really equivalent to shares, but your proposal goes beyond that and distorts the tax system regarding wages, because once employees know that if They receive digital currencies from their workplace – the tax is 25%, and if they receive a regular salary – the marginal tax is 45%, the tax system on income from work is distorted.”
The aid to the crypto companies united the coalition and the opposition
The Knesset members from the coalition who supported the proposal are Yanon Azoulay and Uriel Bosso (Shas), Boaz Bismuth, Dan Iloz, Tali Gottlieb, Nissim Vatori, Ofir Katz and Hanoch Milbitsky and Etti Atiya (Likud), Limor Son Har Melech and Yitzchak Wassarlauf (Otzma Yehudit), Simcha Rothman and Michal Waldiger (religious Zionism).
But the interesting thing is that the proposal was supported by two Knesset members from the opposition: Boaz Toporovsky and Moshe Tor Paz (Yesh Atid). Despite the great tensions between the coalition and the opposition in the Knesset, the attempt to allow unusual benefits for crypto companies succeeded in uniting MKs from both camps. MK Karib and Aida Toma Suleiman (the joint list) opposed the proposal.
A product that contradicts the accepted accounting rules
Every accepted and regulated financial asset, which operates according to accounting rules, is necessarily built from a mirror image of an asset and a liability. For example, loan money is an asset of the bank and a liability of the customer that needs to be returned. In contrast, crypto assets operate in a sort of ‘parallel universe’, which is not adjusted to accounting rules. Anyone can issue crypto-assets without limitation, when their creation does not include any obligation against them. All crypto assets are completely disconnected from other financial assets or real economic activity.
According to Martin Walker, director of securities and bond products at Broadridge in the UK, digital assets fundamentally deviate from conventional accounting rules, in that their creation is done without any corresponding liability being created, and their fundamental value is zero.
The professor of economics Omer Moab believes that what gives economic value to the bitcoin currency, is only a bubble. According to him, “Bitcoin does not have a correct price, and in fact almost anything is possible. Or in the language of economists: there are multiple equilibria here, all of them are bubbles. And you don’t need to know anything about Bitcoin to reach this conclusion, except for one thing: it is an asset that has zero value if everyone thinks which has zero value. In conclusion, Bitcoin is a bubble. There is no reasonable chance that its price will stabilize, therefore, and in addition to other reasons, it will not be a substitute for money for use in transactions, except in an attempt to hide transactions. This is an expensive and wasteful bubble that helps criminal organizations, and harms the environment.”
Nevertheless, crypto-currencies are traded against other crypto-currencies, and sometimes also against normal money, which constitutes a tax event for the tax authorities in every profit obtained. From the point of view of the crypto companies, tax reliefs on trading done in unregulated trading arenas are a significant booster for the motivation to purchase crypto-currencies that they issue.
An achievement for crypto lobbyists that could hurt Israel in the future
‘Davar’ has learned that the drafting of the bill was done in collaboration with Nir Hirschman, a publicist and lobbyist on behalf of the Crypto, Blockchain and Web-3 Companies Forum. Hirschman himself sent a message to the media about it that was published on the crypto news website Coindesk. In the message, Hirschman went as far as saying that the Minister of Finance supports In the bill, it is a sign that Israel is adopting crypto, but in practice, the Minister of Finance requested to put a stop to the promotion of the law for the moment, until his office finishes the headquarters’ work on crypto regulation.
When you go in the right direction, the world media gives your back – yesterday the Knesset voted in a preliminary reading on the abolition of discrimination in taxation against crypto, blockchain and web3 companies. Dan Iloz’s bill, supported by Finance Minister Bezalel Smotrich, is a clear statement to investors around the world – come to Israel. And this call sounds Loud and Clear
— Nir Hirshman (@NirHirshman) July 6, 2023
Hirschman did not respond to Davar’s inquiry regarding his involvement in the bill.
Legislation that goes against the global trend, and may harm Israel
Hirschman is partially right in his claim regarding the adoption of crypto in Israel. In Israel, there are a number of regulatory moves regarding crypto, some of which really promote the adoption of the field into the financial system, while others are actually intended to create tougher regulation, which will make it difficult for crypto companies to operate in the way they currently operate.
But the proposals on the table in Israel elegantly ignore the reality around the world. Such settlement proposals were popular all over the Western world in 2021 and 2022, until the crypto bubble burst starting in May 2022, revealing hollow economic models, countless frauds and marketing tricks, with crypto technology merely being an excuse to siphon billions of money from large and small investors, without ever seeing it back. time.
Today, an enforcement campaign is underway in the United States against the major crypto companies, which are alleged to be knowingly violating the securities laws, not providing proper protection to customers, and misleading their investors as well. Also in terms of regulation, there is a trend in the United States of tightening the rules in the field of crypto, rather than easing them.
The fact that Israel misses the trend, and continues to promote the use, trade and firms of digital currencies, may take revenge on it in the future. CPA Yaniv Angel, taxation expert, consulting firm Auren Israel told “Davar”: “Any change in tax policy and tax legislation in Israel must be in a certain way with global globalization, and especially with changes and developments in OECD countries. An overly lenient tax policy that lowers the tax rate can, in the short term, encourage business activity from abroad to Israel and bring foreign money into Israel, but in the long term there may be an opening for the illegal flow of money into Israel by those interested in reduced tax rates.
According to Angel, “Such funds could be an entry point for capital and illegal and unreported money to Israel, which could damage not only the banking and Israeli system in the short term, but could lower Israel’s credit rating and create long-term economic damage. Therefore, any change in tax policy It must be done with a view to what is happening in the world.”
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