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The US-Israel Legal Review 2019 67
allowed to defer the tax owed on the ICO proceeds,
under certain conditions. This is done by reporting
the income as an advance payment for services
the company is obligated to provide in the future
to token purchasers. The tax duty will arise in the
event of any of the following, depending on the
specific structure of the ICO:
(i) when the platform is launched
(ii) when the service becomes available to users
(iii) at a gradual pace, as the service is actually
provided to users.
The latter method enables token issuers to
deduct development costs from ICO revenues, a
treatmentwhich is verydifferent fromthe approach
taken in other countries where issuers are often
required to pay corporate tax on the full amount
raised, without being able to deduct significant
future development costs. Furthermore, the
circular addresses the legitimate situation where
some token-issuers wish to offer their employees
tokens as an incentive for their work. The circular
states that, in some cases, the ITA allows said
employees to defer the tax payable on this income
until realisation of the tokens, rather than at the
time of the allocation. This approach by the ITA
gives issuers a significant incentive to raise funds
through an Israeli company and it demonstrates
the openness of the Israeli regulator towards the
blockchain industry.
5. If virtual currencies were to become a
mainstream payment system, how might this
affect the ability to control inflation?
In recent years, Israel’s economy has experienced a
negative inflation rate, resulting fromcertainactive
measures taken by the central bank. Naturally, as
the role of virtual currencies in Israel’s economy
may grow, we can expect to see less of the impact of
the central bank’s monetary policies. However, due
to the high volatility of virtual currencies, prices
will continue to be linked to stable fiat currencies
for the foreseeable future, even if payments are
made in virtual currency. Furthermore, virtual
currencies are limited in supply; hence, they are
not likely to impact on inflation of fiat currencies in
the foreseeable future. These factors may provide
some comfort, in that Israel’s central bank will have
the power to control inflation for many years to
come. Lastly, if virtual currencies ever become a
major part of financial transactions globally, this
would indicate that the world’s economies have
switched to global currencies (like bitcoin or a joint
cross country virtual currency). This is likely to
have broad implications on the world’s economy.
It appears more likely that we will witness more
variations of fiat-pegged virtual currencies, and
even state-backed virtual currencies, which will
gradually replace paper money and will have fiscal
policy controlled by central banks.
6. What are the potential risks of virtual
currencies in terms of fraud? Have any specific
instances emerged in which virtual currencies
have been used for money-laundering or other
fraudulent purposes?
The anonymous nature of virtual currencies is
appealling to criminals as a favourable store-of-
valuemethod. Themost common uses are accepting
virtual currencies for ransom and blackmailing,
stealing virtual currencies from exchanges in
hacking attacks, and using virtual currencies for
illicit business transactions.
Another common scam related to virtual
currencies is fraudulent ICOs raising funds with
false promises of the development of a project, with
no actual intention to deliver. This phenomenon
appears to be in decline, as regulators are much
more vigilant and determined to protect the public
from such scams. The advance of regulation in this
area is likely to have a positive impact in this regard.
To address these issues, the Anti Money
Laundering Authority in Israel is guarding the
gateways between virtual currencies and fiat
currencies by demanding that all exchanges
keep records, report suspicious transactions,
and demand a full and detailed source of funds.
These measures will be tightened under the new,
aforementioned AML Order.
Inaddition,localpoliceandotherlawenforcement
bodies are using advanced technologies, in order to
monitor and track transactions related to the illegal
use of virtual currencies.
Recent examples of fraud conducted via virtual
currencies in Israel include:
• In early 2017, an international investigation led
to the arrest of a 19-year-old hacker from Israel.
The hacker was accused of making over 2,000
threateningphone calls andanonymously alerting