Israeli Perspective Bolstered by Move Toward Private Blockchains

Despite Israel’s miniscule size and remote location, the country is a bastion of innovation and technological progress. Its impressive Tel Aviv-based tech sector grows significantly each year and by spending a larger percentage of GDP on research and development than any other major country, Israel is prepared to continue this upwards trajectory. Israel is also very protective of its high-tech sector and works to ensure the proliferation of its products and platforms. The country’s blocking of ride-sharing application Uber last year is a pertinent example. Largely because Israel is undoubtedly more susceptible to disruption, given its size, regulators in the country don’t want to upset the healthy balance they’ve found.

Its wariness of disruption is an obvious reason for Israel’s hesitant outlook concerning blockchain technology as well. Israel’s stance on cryptocurrency and blockchain is currently middle-of-the-pack in terms of creating a favorable environment. Cryptocurrencies in Israel are designated as property and incur capital gains taxes but also a value-added tax for those who mine them. These high taxes are designed to stifle capital outflows into cryptocurrency, but they also preclude blockchain from gaining a foothold.

This is a curious conundrum for a country that is historically enthusiastic to embrace new, beneficial technological platforms. Blockchain is relevant to Israel and can potentially be used to solve many of its issues with unorganized public services, large grey market economies, and more. However, a new trend in blockchain is emerging around the world that might help give Israel the regulatory direction it needs: private blockchains.

Blockchain Drivers, Not Passengers

Israelis were inspired by the cryptocurrency boom of 2017 and the social buzz around bitcoin, as well as the immense advantages that a blockchain-based civilization has over the status quo. The Bank of Israel understands the potentially compromising changes that cryptocurrency could have on their small economy, yet remain excited at the prospect of becoming a blockchain society. It just hasn’t happened yet due to regulators who aren’t sure how to separate blockchain’s negatives from its benefits. Ideally, governments want access to the powers that digital ledger technology provides and avoid the speculative, gambling-adjacent cryptocurrency market reminiscent of the recently banned binary options industry.

Israel’s high-tech scene has been supportive of blockchain and even cryptocurrency, regardless of their government’s opinion. Many popular blockchain projects were born in Israel, only to be headquartered overseas in friendlier regulatory environments like Gibraltar. Israeli cryptocurrency investors are circumventing local regulations preventing participation in ICOs by trading bitcoin on exchanges located outside the country's jurisdiction. Additionally, they’re using decentralized wallet software to avoid institutional finance. This means that the country is missing out on the potentially revolutionary perks that blockchain brings to the table.

By following a model like China’s, the country might be able to accomplish all its goals in one fell swoop. China, recognizing that bitcoin isn’t much of a threat, allow it to be traded within their borders but block any new ICOs from launching, thus stifling most of the illicit coin economy. However, new projects are still being born in the country, just at the behest of (and funded by) governments and municipalities. Just look at the city of Shenzhen’s $80 million investment in blockchain to increase the efficacy of their factories. As the cryptocurrency speculation trends wanes, with bitcoin prices and other cryptocurrencies stabilizing, more institutional entities both private and public are creating their own proprietary blockchains. These private chains bring all the benefits without the uncertainty of decentralized hosting, the liability of crowdfunding, or the volatility of a tokenized service.

Raised by Enthusiasts and Perfected by Professionals

Blockchain began decentralized and funded by the masses because no one person had enough money, or interest (at the time) to invent it themselves. Now that it’s a proven technology, the story is different. Public and private entities are learning that they don’t have to use infrastructure that’s been cobbled together by hobbyists—they can simply fund their own blockchains and be confident that they’ll get the desired result. This is a phenomenon that Israel is also witnessing, and may be the answer the small country needs to finally do more than dip its toes in.

One of the best example of the appropriation of blockchain comes from SWIFT—the international payment system that was once a target of bitcoin. SWIFT is creating a proprietary back-end to upgrade their system by integrating ledger and blockchain technology. This centralized, private blockchain will not be represented by any publicly traded token and will instead simply accelerate and add increased transparency to SWIFT’s operations.

Estonia is also taking a page of out this playbook, by aiming to create its own national cryptocurrency called ‘Estcoin’. Instead of being speculative, Estcoin will make fundraising a public service, as the coin will be used to engage with e-residency services already established in the country. If Israel also jumps on this trend, it has little to lose. Many people see private blockchains already fulfilling the ambitious original goals of bitcoin and accordingly refuse to “invest” in it. The same goes for ICO tokens, due to the fear that an entrenched multinational will simply shell out millions to adopt blockchain in whatever pieces are required to make their own platform more competitive.

Finding a Niche in a Niche Market

In typical Israeli fashion, the government will probably delay any concrete decision on blockchain until it has a clearer plan of action. However, putting the country’s blockchain future in the hands of entrepreneurs and retail investors is not likely to be a part of this plan. If the trends in the rest of the world are anything to go by, Israel will find a way to develop national blockchain infrastructure that is privately funded and more effective than decentralized alternatives. It might even begin with the long-rumored digital shekel. If they prove effective, then it will be like hitting two birds with one stone: stifled speculative motivations and immediate blockchain benefits where they matter most.