Nicknamed the “Startup Nation,” innovative and wealthy Israel is home to a well-developed and exciting fintech ecosystem. The small Middle Eastern country has the world’s most startups per capita,1 the second-highest research and development expenditure per GDP2 and over a dozen fintech unicorns.3 Tech giants—Amazon, Apple, Facebook, Google, Intel, and Microsoft—have flocked to Israel in order to tap local expertise and expand R&D. A friendly regulatory environment, strong cybersecurity and economic resilience have contributed to the country’s status as a global tech leader.
Although Israel’s economy contracted by 2.4% in 2020,4 the finance sector remained stable, and the International Monetary Fund projects a 2021 growth rate of 5%.5 Still, the changing nature of the COVID-19 pandemic lends a measure of uncertainty to Israel’s economic growth and overall future. The state has been widely praised for its speedy vaccine rollout, but August 2021 brought another surge of infections as vaccine efficacy dwindled and restrictions eased. Political turmoil—both domestic and international—has compounded this uncertain landscape.
Despite the health crisis—and in some cases, because of it—Israel’s robust fintech ecosystem is poised for even further expansion. The COVID-19 pandemic has accelerated digital transformation, and governments, businesses and individuals worldwide have rushed to adopt and invest in Israeli digital solutions. The Israeli fintech sector brought in USD $2.3 billion in venture capital investments in the first half of 2021, a 260% increase from the first half of 2020.6 In March 2021, Israel’s first digital bank was launched in pilot mode. Slated for a public launch in early 2022, First Digital Bank will harness innovative technologies like AI7 to offer 24/7 remote onboarding and other services.8 The first half of 2021 also saw the Israeli cybersecurity sector raise a record USD $3.4 billion, and seven Israeli cybersecurity companies became unicorns.9
This year’s ambitious digital agenda focuses on central bank digital currency (CBDC), fintech, artificial intelligence and cybersecurity. As Israel continues to pursue groundbreaking initiatives, regulators must ensure that digitalization drives financial inclusion and that the digital gap does not widen. Digitalization in banking, alongside improvements to digital infrastructure, could be instrumental in providing Arab Israelis, the elderly and other vulnerable communities expanded access to financial services. Regulators must also ensure that further digital transformation dovetails with adequate data protection, as the role of digital technology in response to the pandemic has aggravated Israelis’ fears over surveillance and privacy.10
Financial Regulatory Authorities
The Bank of Israel is the central bank of Israel.
The Capital Markets, Insurance and Savings Authority regulates non-banking financial entities.
The Israel Securities Authority (ISA) seeks to facilitate fairness and transparency in the capital market.
The Privacy Protection Authority (PPA), housed in the Ministry of Justice, enforces the Protection of Privacy Law (PPL).
Policy, Laws and Regulations
Big Data Database, August 2021
The central bank announced a plan that will require commercial banks and credit companies to transfer certain customer data from the past five years, towards the establishment of a big data database. Analysis of the database will reportedly be utilized in strengthening the efficiency of the financial sector and facilitating decision-making on cash use, payments and communication. The bank has yet to comment on the protection of customer data and cybersecurity controls and procedures.11
Memorandum on Fintech Regulatory Sandbox, July 2021
The Ministry of Finance published a Memorandum of Law, which calls for the establishment of a fintech regulatory sandbox. The proposed sandbox will be headed by a committee of officials from the Bank of Israel, the Capital Markets Savings and Insurance Authority, the Israel Securities Authority, and the Anti-Money Laundering Authority. The committee will select the participant fintechs. The sandbox will last for two years, with the possibility of extension. Companies that require a license to operate will participate in the licensing track, and all others will participate in the guidance track. The Memorandum was open for public feedback until 19 July 2021.12
Digital Shekel Pilot, 21 June 2021
Bank of Israel Deputy Governor Andrew Abir stated at a conference that the central bank had conducted an Ethereum-based pilot test on a CBDC, but he remained skeptical that a digital shekel would ever be launched. The announcement came on the heels of a May central bank working paper addressing a potential CBDC. The working paper proposed a draft model wherein the central bank issues the CBDC, which is then distributed by payment service providers.13
As of June 2021, the Palestine Monetary Authority (PMA)—the emerging central bank of Palestine—has been considering the launch of its own CBDC. Palestine does not have its own currency, and instead relies on the Israeli shekel, the Jordanian dinar and the US dollar, and the introduction of a Palestinian digital currency would signal a semblance of monetary authority. The PMA is currently conducting two studies on cryptocurrencies, however, it is unlikely that a Palestinian digital currency will come to fruition. The Palestinian economy and central bank are weak and hindered by Israeli control.14
Request for Information on Biometric Verification in KYC, 12 April 2021
The Identity & Biometric Applications Unit of Israel’s National Cyber Directorate published a Request for Information (RFI) seeking feedback from Israeli and international providers of biometric verification-based know-your-customer (KYC) technologies. The RFI sought information on document scanning and authentication, biometric verification, presentation attack detection (PAD) and other details related to fraud detection, data security tests, product performance and privacy enhancement. The deadline for replies was 14 June 2021. The move comes as the Israeli government seeks to establish onboarding and authentication processes in the access to online government services.15
The Israeli government published an updated draft bill on Cyber Defense and the National Cyber Directorate, which authorizes the National Cyber Directorate (NCD) to direct certain organizations in strengthening cybersecurity. An organization must be engaged in essential activities and have a critical weakness in its cybersecurity, such that a cyberattack against the organization would endanger public interest. The updated bill requires the NCD to confer with an organization and allow it to independently address weaknesses in its cybersecurity before the agency takes action. The NCD may then obtain a court order allowing it to instruct an organization in improving its computer systems.16
Advance Ruling Paper on Cryptocurrency, 21 December 2020
The Israeli Securities Authority issued an advance ruling paper in response to a request by Kirobo Ltd., a blockchain company. The advance ruling paper deemed that cryptocurrency is a security, subject to the Israeli Securities Law, and not a utility token. The regulator also added that the definition of a security must be interpreted broadly, in order to protect cryptocurrency investors.17
National Artificial Intelligence Program, December 2020
A committee headed by AI expert Dr. Orna Berry developed a national artificial intelligence program, which calls for the allocation of NIS 5.26 billion (approximately USD $1.6 billion) towards the development and adoption of AI over a five-year span. The program will unfurl in stages. The first stage, approved in April 2021, allocates NIS 550 million (approximately USD $170 million) towards several initiatives, including the establishment of a High Performance Computing (HPC) supercomputer, bolstering human capital, developing a friendlier regulatory environment and providing support for R&D in neuro-linguistic programming (NLP). In investing in NLP, the program seeks to expand computers’ ability to understand both Hebrew and Arabic. Said Dr. Berry, “Our goal is to develop artificial intelligence to the level of a national forte, but it won’t be just an academic issue. We want to bring about a change in the uses of AI, which will lead to increased labor productivity, contribute to economic growth and improve the quality of services to the public.”
The program will be spearheaded by Telem, the National Infrastructure Forum for Research and Development. Telem is currently searching for a director of the program, who will be housed under the Innovation Authority and report to a steering committee.18
1. Santosdlaz, Richie. “In Focus With Fintech and Israel’s Fintech-Aviv.” The Fintech Times, 24 April 2021. https://thefintechtimes.com/in-focus-with-fintech-and-israels-fintech-aviv/.
2. “Leading countries by research and development (R&D) expenditure as share of gross domestic product (GDP) worldwide in 2021.” Statista, February 2021. https://www.statista.com/statistics/732269/worldwide-research-and-development-share-of-gdp-top-countries/.
3. Levanon, Adi. “Israel’s maturing fintech ecosystem may soon create global disruptors.” TechCrunch, 26 August 2021. https://techcrunch.com/2021/08/26/israels-maturing-fintech-ecosystem-may-soon-create-global-disruptors/.
4. Scheer, Steven. “Israeli economy dips 2.4% in 2020, but COVID hit less than in OECD.” Reuters, 16 February 2021. https://www.reuters.com/article/us-israel-economy-gdp-idUSKBN2AG14I.
5. “Israel.” International Monetary Fund, April 2021. https://www.imf.org/en/Countries/ISR.
6. Farber-Ball, Daniel. “Israeli Fintech companies raise $2.3 billion in the first half of 2021.” CTech, 26 July 2021. https://www.calcalistech.com/ctech/articles/0,7340,L-3913298,00.html.
7. Rochvarger, Michael. “Israel's First Digital Bank Begins Operations, Heralding 'Artificial Intelligence Revolution'.” Haaretz, 15 March 2021. https://www.haaretz.com/israel-news/tech-news/.premium-israel-s-first-digital-bank-begins-operations-heralding-ai-revolution-1.9619382.
8. “Israel's First Digital Bank to offer full digital banking services to US citizens.” CTech, 15 July 2021. https://www.calcalistech.com/ctech/articles/0,7340,L-3912540,00.html.
9. Solomon, Shoshanna. “Israel cybersecurity firms raise record $3.4b, 41% of global sector investment.” The Times of Israel, 01 July 2021. https://www.timesofisrael.com/israel-cybersecurity-firms-raise-record-3-4b-41-of-global-sector-investment/.
10. Keshet, Yael. “Fear of panoptic surveillance: using digital technology to control the COVID-19 epidemic.” Israel Journal of Health Policy Research, 25 November 2020. https://ijhpr.biomedcentral.com/articles/10.1186/s13584-020-00429-7.
11. Zwick, Gilad. “Bank of Israel demands customer data from banks, credit firms.” Israel Hayom, 29 August 2021. https://www.israelhayom.com/2021/08/29/bank-of-israel-demands-customer-data-from-banks-credit-firms/.
12. Scharf, Amir and Ricky Brenner. “CAPITAL MARKETS | ISRAEL CONSIDERS REGULATORY SANDBOX PROGRAM FOR FINTECH.” Tadmor Levy, 07 July 2021. https://tadmor.com/media-item/capital-markets-israel-considers-regulatory-sandbox-program-for-fintech/.
13. “Bank of Israel to explore digital shekel CBDC.” Ledger Insights, 11 May 2021. https://www.ledgerinsights.com/bank-of-israel-digital-shekel-cbdc-central-bank-digital-currency/.
14. Cranny, Manus and Gwen Ackerman. “Palestinian Monetary Authority Eyes Digital currency Launch.” Bloomberg, 25 June 2021. https://www.bloomberg.com/news/articles/2021-06-24/palestinian-monetary-authority-mulls-digital-currency-launch.
15. Burt, Chris. “Israel posts RFI for biometric KYC systems to be used in government services.” Biometric Update, 19 April 2021. https://www.biometricupdate.com/202104/israel-posts-rfi-for-biometric-kyc-systems-to-be-used-in-government-services.
16. Ravia, Haim and Dotan Hammer. “Israeli Gov’t Revises Draft Bill Granting Powers to the National Cyber Directorate.” Lexology, 31 March 2021. https://www.lexology.com/library/detail.aspx?g=358a4226-f487-41c4-992b-e5b2a53e08d2.
17. Ravia, Haim et al. “Israel: Israeli Regulator Says Cryptocurrency Is A Security Subject To The Israeli Securities Law.” Mondaq, 02 February 2021. https://www.mondaq.com/fin-tech/1031864/israeli-regulator-says-cryptocurrency-is-a-security-subject-to-the-israeli-securities-law.
18. Ziv, Amitai. “Israel Is Lagging on AI. It Will Now Invest Billions to Bridge the Gap.” Haaretz, 12 April 2021. https://www.haaretz.com/israel-news/tech-news/.premium-the-ai-nation-israel-to-appoint-artificial-intelligence-czar-1.9703391.
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Last updated: November 2021