Israeli Capital Market Authority Tightens Crypto Regulations with New Capital and Custody Rules

The Israeli Capital Market Authority, led by Commissioner Amit Gal, has introduced two new regulatory directives to strengthen oversight of cryptocurrency companies and enhance consumer protections. Published on Tuesday, these directives impose stricter capital requirements and custody rules on the nine licensed crypto service providers operating in Israel, who must comply within six months.

The new capital directive mandates a tiered minimum equity based on service risk: companies without custody services must hold at least 2 million shekels in equity, while those offering custody must maintain a minimum of 2.5 million shekels. Custodians are also required to allocate an additional dynamic capital buffer equal to 0.25% of the total client assets held. All required capital must be held in cash, bank deposits, or short-term government bonds, free of liens, to ensure liquidity and protect against market volatility.

The custody directive establishes a legal and technological framework to prevent incidents like the FTX collapse. It requires full segregation of client assets from company assets, held in trust to protect clients in case of company insolvency. Companies must appoint a dedicated custody officer (not a board member) and engage an independent auditor for quarterly reviews. Strict protocols govern transfers between hot wallets (online) and cold wallets (offline), requiring encrypted digital approvals from multiple officials to reduce risks of errors, fraud, or cyberattacks.

Outsourcing custody to foreign entities is permitted only if those entities are licensed in jurisdictions with recognized regulatory regimes, such as the UK (FCA) or EU countries under MiCA regulation. Israeli companies must monitor asset balances daily and disclose insurance and legal remedies to clients. To address withdrawal freezes during market volatility, companies must implement systems ensuring clients can access their assets within a reasonable timeframe, even during operational or cyber incidents.

These measures complement broader regulatory reforms. Earlier this month, the Bank of Israel’s banking supervisor proposed replacing automatic due diligence on crypto deposits over 100,000 shekels with a risk-based model that recognizes licensed crypto firms as lower risk. This change removes a major barrier for crypto companies and investors by eliminating the need for banks to trace the historical path of digital assets once converted through regulated entities.

Additionally, the Capital Market Authority recently published a draft law to regulate stablecoin issuance in Israel. Stablecoins, pegged 1:1 to fiat currencies like the shekel or dollar, have become a major growth driver globally with monthly transaction volumes around $2 trillion. The proposed regulation would grant the Authority licensing and supervisory powers over stablecoin issuers, aligning Israel with international standards.