Overview
Israel has published a legislative memorandum proposing a dedicated regulatory framework for the issuance of stable digital currencies, commonly referred to as ‘stablecoins’. The Legislative Memorandum for the Financial Services Supervision Law (Issuance of Stable Digital Currencies), 5786-2026 (the “Memorandum”) would establish a licensing, supervision and enforcement regime for fully-backed stablecoins in Israel.
The Memorandum responds to what the government identifies as a regulatory vacuum in Israel’s treatment of stablecoin issuance; Globally, more than 200 stablecoins are currently in circulation, with monthly activity estimated at nearly $2 trillion and hundreds of millions of users. In Israel, however, the absence of a dedicated legislative framework has raised concerns regarding fraud, deception, theft or loss of financial assets, money laundering and tax evasion.
If enacted as proposed, the new framework may affect a broad range of market participants, including Israeli issuers, foreign issuers targeting Israeli-resident customers, digital-asset businesses, financial service providers, investors acquiring control or significant holdings in issuers, and product, marketing and compliance teams involved in stablecoin offerings.
Why This Matters
For Israeli market participants:
Entities issuing or seeking to issue stablecoins in Israel would, under the proposed regime, be required to obtain a dedicated license and comply with substantive ongoing requirements covering capital adequacy, governance, reserve-asset management, disclosure and cyber protection and risk management.
Investors acquiring control, becoming interested parties, or holding reportable means of control may be subject to permit and reporting requirements.
For foreign market participants:
One of the most significant matters addressed in the Memorandum is its cross-border reach. The proposed regime may apply where a foreign entity issues or enables the use of stablecoins by Israeli-resident customers and directs its activity to those customers, even if the issuer or the seller have no physical presence in Israel.
The Memorandum sets out a non-exhaustive, substance-based test for determining whether a foreign entity directs its activity to customers in Israel. Relevant indicators include allowing an Israeli address in the onboarding or engagement process, communicating with customers in Hebrew, offering services in Israeli currency, or through Shekel-pegged stablecoins, and cooperating with financial or payment service providers to provide or make services accessible to customers in Israel.
Key Features of the Proposed Regime
Licensing
Issuing stablecoins would require a dedicated license under the proposed regime. Applicants would be required to demonstrate integrity and probity, financial stability, technological and cyber infrastructure, and the ability to comply with applicable requirements. Applicants would also be required to operate through a corporate legal framework and would be subject to equity capital requirements.
The proposed regime would be administered by a supervisor for stable digital currencies appointed under the law (the “Supervisor”), with the regulatory framework led by the Capital Market Commissioner (“Commissioner”). The Supervisor would be authorized to impose additional requirements, including capital adequacy, procurement of professional liability insurance, asset-type restrictions, liquidity requirements and investment limitations.
Application to Foreign Issuers and Cross-Border Activity
A license may be granted to a foreign issuer operating outside Israel, provided that the issuer is supervised in its home jurisdiction and that foreign law provides adequate customer protection. This is not framed as a complete exemption from Israeli licensing: the Memorandum also propose to allow the Supervisor to consider the foreign issuer’s home-country regulation and, where appropriate, grant exemptions from certain Israeli requirements or impose tailored requirements, while still requiring an Israeli license. The Commissioner would supervise such entities’ operations in Israel.
The Memorandum also proposes a substantive nexus test for foreign entities targeting the Israeli market. Under the proposal, Israeli law may apply where a foreign entity issues or enables the use of stablecoins by Israeli-resident customers and directs its activity to those customers.
The Memorandum also reflects broader international regulatory trends, including concepts familiar from the EU’s MiCA framework, such as asset-referenced tokens structures based on baskets of reference assets.
Control, Interested Parties and Investments in an Issuer
Acquiring control of an issuer or becoming an interested party would require a permit from the Supervisor. Transfers of means of control to a person who requires but lacks such a permit would be prohibited where the transferor is aware of this fact. Holders of more than 5% of means of control in a corporate issuer would be subject to annual reporting duties. The Memorandum also proposes requiring approval by the Supervisor for a merger of a stablecoin issuer with another corporation, in addition to any approval required under other applicable law.
Corporate Governance and Officers
Issuers would be required to maintain a board of at least three members, a CEO, an auditor and a compliance officer. The Supervisor would be authorized to set additional fitness requirements for officers, including educational qualifications, professional experience and examinations. The Memorandum also proposes requirements regarding the appointment of an auditor and applying certain Companies Law provisions to the auditor as if the issuer were a public company.
Reserve Assets and Redemption
Issuers would be required to maintain full, continuous matching between issued stablecoins and reserve assets of at least 100%. Reserve assets must be sufficiently liquid and secure for immediate redemption, segregated from the issuer’s own assets, and used exclusively to meet obligations to holders. The Memorandum further contemplates priority for holders over other creditors in an insolvency scenario, based on the issuer’s obligations to holders.
Importantly, the broader “holder” concept is not limited to persons who purchased directly from the issuer. It may also include persons who acquired the stablecoin from other lawful sources, including from third parties. Key protections, including disclosure, redemption and reserve-asset safeguards, are framed by reference to holders.
All holders would have a fundamental right to redeem stablecoins at any time, promptly and under a detailed mechanism. Redemption fees would be prohibited, and issuers may not burden, condition or limit redemption by quantity. Interest payments to holders would also be prohibited in order to distinguish stablecoins from yield-bearing investment instruments.
Disclosure and Reporting
Under the proposed regime, stablecoins could not be offered to the public unless the issuer has published a Hebrew disclosure document covering all matters relevant to a reasonable holder, including the reserve mechanism, redemption policy, regulatory and operational risks, involved parties, and safeguarding of reserve assets. Issuers would be required to update disclosure documents for new material information, material errors or inaccuracies that may mislead the public.
Issuers would also be required to publish detailed monthly reports, which will be subject to review or control requirements, and to disclose on their website the number of circulating coins and the current value and composition of reserve assets. Misleading conduct by act or omission, unfair influence, and tying services to other purchases would be prohibited.
The Memorandum also contemplates rules on the required content, wording and delivery of contracts for the purchase and sale of stablecoins.
Information Security and Risk Management
Licensees would be required to maintain advanced mechanisms for information security, risk management, cyber protection and business continuity.
Enforcement
The Supervisor would have broad supervisory and enforcement tools, including powers to require the correction of deficiencies, issue orders to stop or prevent unlicensed activity, and impose administrative monetary sanctions for violations relating to licensing, reserve assets, capital requirements, redemption, disclosure, misleading publications and Supervisor instructions.
Criminal offenses are also contemplated for issuance without a license, holding means of control without a required permit, or knowingly transferring means of control to a person lacking a required permit. Officers would bear supervisory duties intended to prevent corporate violations.
Practical Implications
- Potential issuers may wish to assess their readiness for licensing requirements, capital adequacy, technology and cyber infrastructure, risk management, governance, disclosure and ongoing reporting.
- Foreign entities should consider whether their activities may be viewed as directed at Israeli-resident customers, which may trigger licensing requirements regardless of physical presence.
- Investors and control holders should consider whether their holdings, acquisitions or transfers of means of control require a permit from the Supervisor and ongoing reporting.
- Product, marketing and compliance teams may wish to assess the need for Hebrew disclosure documents, website disclosures, customer-facing documents, material-event updates and compliant customer-service interfaces.
- Boards and senior management should consider the proposed corporate governance and oversight requirements, including board composition, officer qualifications, compliance, cyber and risk-management arrangements.
Next Steps and Open Issues
The Memorandum is a preliminary stage prior to submission of a legislation Bill and the approval process in the Israeli Parliament. We expect the legislation process to take considerable time.
The Bank of Israel, in consultation with the Supervisor, is expected to set principles and criteria for stablecoins with significant monetary impact or significant impact on financial-system stability; a separate memorandum is expected. Additionally, the Minister of Justice, together with the Minister of Finance, is examining whether additional consumer-protection regulation is needed, taking into account the Payment Services Law, 5779-2019. The Memorandum also notes that amendments to Israel’s Prohibitions on Money Laundering Law may be examined to address supervision of stablecoin activity from an AML perspective.
Conclusion
The Memorandum signals a potential shift from the absence of a dedicated Israeli framework for stablecoin issuance to a comprehensive licensing and supervision regime. Its cross-border dimension is particularly significant: foreign entities that direct stablecoin-related activity to Israeli-resident customers may fall within scope even without physical presence in Israel.
What to do now: Potentially affected entities should assess the Memorandum’s impact on their future operating structure, licensing status, compliance programs, customer documentation, reserve-asset management, redemption mechanisms and overall regulatory exposure.
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
