Netanyahu's Crypto Vision Faces Hurdles, Experts Warn

Prime Minister Benjamin Netanyahu has reportedly ordered the development of a plan to utilize cryptocurrency and blockchain technology to circumvent potential banking sanctions. The initiative aims to establish alternative payment channels for Israel, particularly for international transactions where traditional banking might be inaccessible.

However, experts in the field express significant reservations about the feasibility and effectiveness of such a plan. While acknowledging the potential of cryptocurrency for direct peer-to-peer value transfer, they emphasize that it does not inherently bypass international regulations, sanctions, or the need for counterparties to accept and be able to use the funds. Ben Samoha, founder and CEO of Crypto Jungle, suggests Netanyahu's directive is likely a contingency for emergencies, but warns that widespread economic isolation would severely impact Israel's economy, even with crypto.

Nir Hirschman, CEO of the Israel Crypto, Blockchain and Web3 Companies Forum, highlights the growing use of stablecoins, which are pegged to traditional currencies, noting their significant annual turnover. He points to the US GENIUS Act as an example of regulatory frameworks being developed for stablecoins, underscoring that the technology itself does not grant immunity from financial rules like anti-money laundering and sanctions compliance.

Experts differentiate between payment channel issues and outright trade bans. If a supplier is prohibited from trading with an Israeli entity, simply changing the payment method to cryptocurrency will not legalize the transaction. Furthermore, the ability to convert crypto back into usable traditional currency, the need for credit, insurance, and transportation in international trade, and the potential for crypto assets to be frozen by issuers like Tether (USDT) pose substantial challenges. "It's not that we won't be able to transfer coins, it's just that we won't be able to get anything in return," Hirschman cautioned, referring to a scenario of crippling sanctions.

Tal Hafling, an independent finance researcher and former senior official in crypto supervision, advises considering risks beyond asset value depreciation, including access and usability. She notes that while holding foreign assets can mitigate exposure to the shekel, it doesn't solve access issues if the problem lies with the institution. Self-custody of crypto offers more control but requires responsibility for access and raises questions about convertibility and potential issuer-related freezes. Hafling warns that integrating crypto into the traditional financial system will not be easy.

The broader economic impact of sanctions on Israelis would likely be felt first in prices and livelihoods, with potential increases in energy and food costs and reduced product variety due to trade disruptions. While crypto might offer alternative payment channels, its effectiveness in maintaining a thriving open economy under severe sanctions remains uncertain. A practical plan, experts suggest, would need to define clear objectives, identify permitted transactions, outline foreign partners, liquidity sources, security mechanisms, and demonstrate how credit and conversion capabilities would be maintained.