Israeli Regulators Tighten Crypto Market Rules to Boost Investor Protection

The Israeli Capital Market, Insurance and Savings Authority is advancing new mandatory regulations aimed at strengthening oversight of the digital currency market in Israel. Following last week's draft guidelines from the Bank of Israel to ease crypto fund deposits in banks, the Authority has now issued binding directives set to take effect in six months. These require all licensed financial asset service providers to comply with stricter supervision standards.

Key changes include increased capital requirements: crypto service firms not holding client assets must maintain at least 2 million shekels in equity, while custodial firms must hold at least 2.5 million shekels plus an additional 0.25% of the total value of client assets under custody. Capital must be held only in cash, bank deposits, or short-term government bonds, excluding digital currencies, to ensure liquidity during crises.

The regulations also mandate complete separation of client assets from company assets, with dedicated accounts protecting client holdings from company creditors in bankruptcy. Digital wallet management will require multi-signature approvals and advanced security measures, especially for transfers between hot and cold wallets. Firms must maintain daily records of client assets, provide clients with personal access to their holdings, and ensure asset withdrawals remain possible during cyberattacks or system overloads.

Internal controls will be enhanced, including appointing a dedicated client asset officer outside the board and conducting regular internal and quarterly external audits. Use of foreign custodians is permitted only if they operate under recognized regulatory frameworks such as the UK's FCA or the EU's MiCA, with Israeli firms retaining full responsibility and daily monitoring obligations.

These measures complement ongoing regulatory efforts, including recent Bank of Israel guidelines lowering risk classification for crypto-origin funds processed through licensed entities and upcoming legislation to regulate stablecoins. For investors, the new rules aim to reduce risks of platform failures and asset losses seen globally, though they may increase operational costs and entry barriers for new market participants. The Authority views the reforms as essential for building public trust and aligning Israel’s crypto market with international standards.