Considered amongst the most advanced startup ecosystems in the world, Israel is now quickly emerging as a leading blockchain hub.

Israel’s development of cutting-edge technologies in software, communications and the life sciences have evoked comparisons with Silicon Valley. Nicknamed the Startup Nation, Israel currently has the highest density of startups per capita in the world, ranks 10^th in the 2018 Bloomberg Innovation Index, and is first in the world in expenditure on research and development as a percentage of GDP.

“Israel boasts a warm, receptive, and supportive environment for startups,” Yaniv Altschuler, co-founder and CEO of Endor and a researcher the Massachusetts Institute of Technology (MIT), told CoinJournal.

“The result of the vibrant and healthy ecosystem is that an extraordinary amount of successful tech companies has been founded in Israel, such as ICQ, Wix, and Waze. […] The culture fosters innovative thinking, where people are always being pushed to invent the next way of making life easier, faster, and more efficient.”

Israel’s thriving blockchain industry

Israel’s rich tech history and its prowess in fields such as cryptography, fintech and cybersecurity, as well as the favorable and warm regulatory environment, have been crucial in Israel’s emergence as a top blockchain and crypto hub. Additional, Israel has a remarkable number of scientists and engineers, all of whom are used to an extremely collaborative culture and have a keenness in entrepreneurship.

As of the beginning of the year, Israel had 88 startups in the blockchain and crypto field. A significant 39% were in fintech, with 22% in enterprise and cloud computing, and another 21% in social media. 13% of these companies are in infrastructure and protocol development, according to Daniel Peled, president and co-founder of Orbs, a startup based in Tel Aviv building a hybrid blockchain with built-in interoperability features that complements and scales base-layer protocols such as Ethereum.

“The past few years have been critical for Israel – some of the biggest initial coin offerings (ICOs) originated in Israel (KIN, Endor, Sirin Labs, Orbs) and now we are also starting to see a movement of the financial and investment sectors, that are typically slower to embrace emerging technologies,” Peled said.

For him, one of the most significant recent developments in the area of crypto regulation is the Israel Securities Authority’s interim report on regulation of public ICOs, which was issued on March 19.

“Like other market participants, we had the opportunity to meet and discuss issues with the ISA as they prepared their research. They actually did an amazing job of researching, understanding, and summarizing both the crypto space and the approaches adopted in various jurisdictions around the world,” he said.

“It is also very clear from that report, and our own discussions with ISA committee members, that they are not out to kill the market, but are looking to strike the right balance between allowing crypto business to flourish within Israel and protecting token/cryptocurrency holders’ rights.”

Israeli corporations warm up to blockchain

Israeli corporations are increasingly recognizing the potential of blockchain technology. In 2017, Bank Hapoalim began a collaboration with Microsoft to create digital bank guarantees based on blockchain. The US tech giant recently partnered with Blockchain Israel to launch the Israel Blockchain Academy, which will be geared toward senior executives and developers seeking more in-depth knowledge of the industry, Altschuler noted.

“Development of the blockchain industry began with a receptive culture where people naturally collaborate and are used to thinking globally due to the small country size, and was built up into a start-up ecosystem that rivals anywhere else in the world,” he said.

“Many banks have also been very supportive of this technology and the growing Israeli blockchain and startup ecosystem, establishing partnerships with them, along with large corporations such as Accenture and Intel.”

Orbs’s sister company Hexa Labs has been working with companies wanting to integrate blockchain into their backend or creating spinoff projects to experiment with the technology. The two companies, part of the Hexa Group, count partners that include Kakao’s blockchain subsidiary Ground X, the South Korean province of Gyeongsangbuk-do, and Endor, another blockchain startup based in Tel Aviv.

Endor utilizes blockchain technology, the new science of Social Physics, in conjunction with AI and big data, to analyze trends and patterns to effectively predict human behavior

The startup, which counts companies like Walmart and Coca-Cola as its customers, is also partnered with several Israeli-based companies such as Leumi Card, the country’s leading credit card provider, supplying the firm with predictive analytics solutions and helping it leverage blockchain technology.

Challenges remain

But while Israeli enterprises and large corporations have been dipping their toes into blockchain, adoption remains slow compared to Asian markets.

“Korea, China and Japan, for example, have a culture of mobile payments that is years ahead of the West, which makes a transition into a blockchain backed economy smoother and more natural,” Peled noted.

“In Korea, for example, we see corporate giants like Kakao, T-MON, Line, and more who already have committed substantial resources into realizing a vision of integrating blockchain technology and crypto-economic models. They are the real drivers of adoption and in my view, are the reason the ‘blockchain nation’ will come out of Asia.

“Israel should be doing more to educate the public; consumers still only have a vague idea of what is cryptocurrency and what can be done with it, and how it can affect their lives.”

Peled and Altschuler also cited regulation and education as key challenges to blockchain adoption in Israel.

To fill the knowledge gap, the Hexa Foundation, the non-profit arm of Peled’s firm, has been focusing on educating Israel’s markets, regulators, policy makers and the public. Its consultancy arm Hexa Labs has been working to consult local banks and corporations about blockchain and its use cases.

On the topic of regulation, Peled noted that although Israeli regulators have been engaged in a positive dialogue with the blockchain community, there is still a long road ahead.

Altschuler noted the Israeli Central Bank’s decision to consider virtual currencies such as Bitcoin to be securities and taxed as such. Another is that, with the comprehensive regulation introduced, there has been some restrictive regulation, for example, cryptocurrencies cannot trade on the Tel Aviv Stock Exchange. “While regulation provides certainty, it can also lead to such challenges,” he said.