In Short

The Israel Securities Authority recently established guidelines on when a cryptographic currency (token) is considered a security. The ISA determined that Kirobo tokens meet the definition of a security. This is primarily because the The Israel Securities believes investors would intend to purchase the tokens for financial purposes. In addition, these investors would anticipate their holdings to go up in value.

Staff Position Main Points

In early 2021, the ISA published a response to Kirobo’s preliminary request. Kirobo’s main product is the provision of the possibility of canceling blockchain transactions. Kirobo sought to allow payment for the service, inter alia, through tokens issued by it. Therefore, Kirobo applied for the ISA’s confirmation that such tokens are not considered “securities.”

The ISA did not accept Kirobo’s position and delineated cryptographic currencies as securities. The ISA based its position both on a linguistic examination of the “securities” definition and on a purposeful interpretation. Linguistically, the ISA noted that most cryptographic assets meet the literal elements of the “securities” definition, under the Supreme Court’s jurisprudence whereby one must interpret linguistic elements broadly.

From a purposeful perspective, the ISA’s staff examined the following factors:

  1. The purpose of the investment in the eyes of the tokens’ purchasers;
  2. The usefulness of the token in the issuance stage;
  3. The entrepreneur’s representations and promises, including a promise for profit and creation of a secondary market, along with efforts to create such a secondary market after the issuance.

Therefore, the The Israel Securities held the company’s tokens constitute securities. This is primarily because it is likely investors would purchase the tokens for financial purposes with the expectation their holdings would increase in value. This is comparable to the characteristics of investment in securities.

The Tests the ISA Implemented

The purpose of the investment in the eyes of the tokens’ purchasers – financial investment as opposed to other investments  – This examination considers the existence of a secondary market that allows liquidity and trade, whether the company holds tokens that would financially incentivize it to act toward ensuring holders’ profits, the development of future products that would increase the tokens’ financial value, restrictions of supply, and price control.

Recruiting investment and its management by others – This examination considers the investors’ passivity and dependence on a third party (the token distributer), similar to the characteristics of holding a security.

Application and relevance of securities laws – This examination considers a range of factors, aside from the disclosure aspects.

It is interesting to note that the ISA’s application of these factors resembles, and at times is identical to, the application of the Howey test by the US Securities and Exchange Commission in respect of cryptographic assets. The SEC outlined these factors several years ago in its “Framework for Investment Contract Analysis of Digital Assets.” The main factor of the Howey test is the “reasonable expectation of profits derived from efforts of others.”

In its test, the Israel Securities Authority has taken the path forged by the SEC. For instance, it applies such factors as the subjective expectations of token purchasers and investment recruitment and management by others.