A New Draft Bill Seeks to Regulate the Stablecoin Market in Israel

Israel has taken a significant step toward regulating the digital assets sector with the publication for public comment of its first draft bill establishing a regulatory framework for stablecoins. The proposal follows the global trend toward dedicated stablecoin regulation, joining other major jurisdictions that have recently adopted comprehensive frameworks, including the European Union under MiCA and the United States under the GENIUS Act. Although influenced by both regimes, the Israeli proposal appears to draw primarily on the European model, as reflected in the comparison below.

What Is a Stablecoin?

A stablecoin is a blockchain-based digital asset whose value is linked to a reference asset to maintain a stable value. That reference asset may be a fiat currency (such as the Israeli Shekel or the U.S. Dollar), gold, a basket of financial assets, or any other asset. In this respect, stablecoins share certain economic characteristics with financial derivatives, as their value is linked to the performance of an underlying reference asset.

Core Elements of the Proposed Regulatory Regime

Statutory Definitions – For the first time, Israeli legislation would introduce statutory definitions for key concepts, including ‘stablecoin’, ‘digital asset’, ‘reserve assets’, ‘reference asset’, and ‘significant stablecoin’. These definitions are intended to provide greater legal certainty and establish a common regulatory framework for market participants.

Licensing and Supervision – The issuance of stablecoins would become a licensed activity. No person may issue a stablecoin in Israel without first obtaining a license from the Capital Market, Insurance, and Savings Authority, which would also be responsible for ongoing supervision through a dedicated supervisor.

Reserve Requirements – Stablecoins would be required to be backed by reserve assets equal to at least 100% of their outstanding value.
Those reserve assets must be segregated from the issuer’s own assets, ensuring they remain available exclusively for the benefit of stablecoin holders even in the event of the issuer’s insolvency.

Redemption Rights and Disclosure – Stablecoin holders would be entitled to redeem their tokens without paying redemption fees.
In addition, prior to issuance, issuers would be required to publish a detailed disclosure document describing, among other things, the operation of the stablecoin, the redemption mechanism, and the principal risks associated with holding it.

Corporate Governance – The draft bill imposes governance requirements on issuers, including the appointment of a board of directors, an external auditor, and an independent compliance officer, along with appropriate internal management and control mechanisms.

Foreign Issuers – The proposed framework would permit the licensing of foreign stablecoin issuers that are already licensed under comparable regulatory regimes. However, the draft does not specify which foreign jurisdictions will be recognized, leaving this determination to the discretion of the regulator on a case-by-case basis.

Prohibition on Interest Payments – The draft bill prohibits issuers from paying interest or providing any comparable economic benefit to stablecoin holders, whether directly or indirectly, through a third party. As a result, the prohibition cannot be circumvented through bonuses, rebates, compensation arrangements, or similar mechanisms intended to replicate the economic effect of interest. This issue has been the subject of significant debate in the United States under the GENIUS Act, particularly regarding whether third parties (such as cryptocurrency exchanges) may offer yield on stablecoins. The Israeli proposal takes a stricter approach by expressly prohibiting such arrangements and closing potential avenues for indirect interest payments.

Practical Business and Regulatory Implications

The draft bill represents a significant step toward establishing a dedicated regulatory framework for stablecoins in Israel, aligning the country with the broader global trend toward comprehensive digital asset regulation. If enacted, we believe the proposed framework will have a number of significant business and regulatory implications, some of which are outlined below.

Greater Legal Certainty – If enacted, it is expected to provide greater legal certainty by introducing a coherent and reliable regulatory regime. This, in turn, should enable market participants to make more informed business decisions, prepare for regulatory requirements with greater confidence, and reduce legal, regulatory, and compliance risks.

Lower Barriers to Market Entry – A dedicated regulatory framework is expected to reduce the legal uncertainty that has historically constrained the development of the Israeli digital assets market. Greater regulatory clarity may also encourage fintech companies, technology providers, and investors to develop innovative stablecoin-based products and services and pursue ideas that were previously difficult to implement in the absence of a defined legal framework.

A New Competitive Landscape for Financial Institutions – Banks, payment institutions, credit card companies, and other financial service providers must explore stablecoin-based payment, settlement, and treasury solutions. In our view, institutions that successfully integrate blockchain-based infrastructure into their existing offerings are likely to gain a meaningful competitive advantage, while those that delay adoption may face growing competitive pressure.

Further Integration of Traditional Finance and Digital Assets – The proposal may also support the broader adoption of blockchain-based financial infrastructure in Israel. As tokenization continues to expand globally, stablecoins are expected to play a key role in settling digital asset transactions and may help drive the development of new financial products and tokenized capital markets.

Stablecoins as a Catalyst for Financial Innovation

Stablecoins have the potential to serve as a significant infrastructure layer for financial innovation and the development of new financial products and services for customers in Israel. The establishment of a dedicated regulatory framework may accelerate the adoption of stablecoins and create opportunities across several key areas:

Payments Infrastructure
Compared to traditional payment infrastructures, stablecoins enable near-instant settlement, continuous 24/7 availability without reliance on traditional banking hours, and more cost-efficient cross-border payments by reducing the number of intermediaries involved. In addition, the use of ‘programmable money’ may facilitate the automation of payments, financial arrangements, and complex business processes through smart contracts, while enabling seamless integration with digital applications and blockchain-based infrastructure. These capabilities may support the development of innovative payment solutions, enhance user experience, and increase competition in the Israeli payments market.

Foreign Exchange Markets
The introduction of shekel-denominated stablecoins may create new competitive dynamics in the foreign exchange market, particularly in transactions between the Israeli shekel and foreign currency-backed stablecoins, such as those linked to the U.S. Dollar or Euro. Unlike the traditional model, in which foreign exchange transactions are primarily conducted through banks or specialized financial institutions, stablecoins may enable foreign exchange activity to be conducted directly on blockchain networks, supported by a broader range of service providers and digital platforms.

The draft bill would permit not only shekel-backed stablecoins but also stablecoins linked to foreign currencies and other reference assets. This may encourage additional issuers and service providers, increase competition in the foreign exchange market, and improve pricing and transaction terms for users.

Tokenization of Financial Assets
In recent years, a global trend has emerged toward the migration of traditional financial assets, including equities, bonds, exchange-traded funds, and other investment products onto blockchain-based infrastructures. This development may enable more efficient trading and settlement of financial assets, broaden investor access, shorten settlement cycles, and reduce operational barriers.
In particular, this may enable the future creation of new blockchain-based financial products, including assets denominated in Israeli Shekels or linked to Israeli underlying assets, thereby expanding the range of investment opportunities available to investors in Israel.

Attracting New Capital and Economic Activity
The proposed framework may also have broader implications for the Israeli economy. By creating a regulated environment that may facilitate the entry of international stablecoin issuers and digital asset service providers into the Israeli market, the framework could contribute to increased investment and economic activity in the sector.
Moreover, given that the draft bill requires stablecoins to be fully backed by reserve assets (such as government bonds), its implementation may, depending on the applicable regulatory requirements and market adoption, influence demand for the underlying assets used as reserves.

The industry will now turn its attention to the public consultation process and the final legislative text, which may become a defining factor in the development of Israel’s stablecoin market and the broader digital finance landscape.