יו"ר רשות ני"ע בכנס רשות החדשנות: לא נאפשר לחברות שערכן מבוסס על ערך הביטקוין להיכלל באחד המדדים של הבורסה

ISA Chairman, Prof. Shmuel Hauser:

Fin-Tech and ICOs

Technological Progress, Regulation and Investor-protection

People love to talk Fin-Tech. I looked at google trends and found that since 2008 Fin-Tech has been trending up significantly while IPOs are trending down. A similar upward trend appeared for the words: “Blockchain” and “Bitcoin”.

The trending down phenomena of IPOs around the globe reflects the fact that becoming a public company and listing securities for trading in the exchange is not as attractive as it used to be years ago. To a large extent it is because there are many alternatives nowadays to raise capital then in the past, such as P2P, crowdfunding, Private Equity funds, dark pools and others. See what happened in some selected markets. The number of public companies since 2008 is declining. These days the number of public companies in the US, for example, is less than they it had been in 1976.

So, when we look at the global trends, let's try to imagine the financial industry in tomorrow’s world. It is likely that, investment advisers will be computers; portfolio managers will be robots; trading will be based on mathematical algorithms; borrowing and lending will operate in automated bilateral trading systems; capital for various and possibly unidentifiable ventures will be raised on the internet, without any human intervention; social network members will send each other investment tips in text messages and follow each other to jointly invest in what has become known as social trading.

And, how will the banking industry may look like given P2P ventures and alike? Will there be the same bankers we are familiar with? How will we pay? Will information be presented in the balance sheet? Will there still be deposits for lending?

One way or another, Fin-Tech appear to call for a re-evaluation of regulatory schemes partly because of the fact that the securities laws were enacted years ago.

From a regulator perspective, we want make sure that Fin-Tech will not be a revolution that creates anarchy. We don't want Fin-Tech to be viewed as a JUNGLE of investments in which the interests of the public are not protected. I am saying it because it is important to realize that today there is an entire world of very risky investments, such as those who offer binary options that are more akin to gambling yet pretend to be legitimate investments. These investments, that sometimes promise non-risky and easy profits to potential investors, who are unaware of the risks they entail, make up an entire world that operates in the dark that raises some weighty dilemmas: legal dilemmas, economic dilemmas, and even ethical and moral dilemmas.

These questions, by the way, are particularly important in a low-interest environment when investors are looking for higher returns and easy profits and are too often tempted to venture in such investments, without realizing their risks.

Interesting to note is the ISA attempt to address these issues by publishing a public warning to alert the public to the risks related to unregulated investments.

Do you think it helped? Nope!!! Surprisingly or not, people are still tempted to invest, and when they lose money, they ask – Who is there to protect us? This explains why regulators need to adopt some degree of paternalism in protecting investors. While risks and losses are an integral part of the worlds of investments, unregulated investments carry additional risks that are hard to predict and estimate. This includes: lack of transparency, lack of corporate governance mechanisms, financial instability, clients' inability to monitor their investments or confirm that they are aligned with their preferences, etc.

These are our main challenges in the forthcoming years. I would like to present to you some interesting examples that illustrate the challenges regulators are currently facing, and then I will elaborate my discussion on Digital currencies.

Crowdfunding: P2P, or P2B lending, are all forms of funding that have great potential. However, crowdfunding legislation fundamentally means that we exempt funding of limited sums of money, from the burden of supervision and regulation. I am emphasizing it because the number of failures of such ventures is 3 times greater than those who finance by banks, for example.

Public offering: When internet-based ventures that publish through the website a call for the public to invest in their projects, fail to examine if it is an offer of securities, we will have to ask ourselves if these are securities that fall under the securities laws or not.

Trading Platforms: When they are licensed, they may provide legitimate platforms for trading forex and other financial instruments. But not always. One such example is the binary options when we found that they are frequently engaged with fraud and deception. Note also that regulators are also faced with another problem, when these platforms offer additional services that may be in conflict of interests with their trading services (e.g., brokerage services).

Robot trading: Computers today not only execute trading orders but also make investment decisions and give the trading orders - what we call Algo-Trading. Today, in order to keep one step ahead of the competitors, trading algorithms are programmed also to predict the existence of other algorithms and their activities. So, what we are seeing today are also “street fights” among these algorithms.

From a regulatory perspective, we need to ask ourselves if the current law that was drafted years ago, is applicable to robot advisers? Who exactly is the adviser? Is he the robot? Is he the person who wrote the software program? Is he the person who operates the program? Our challenge is to fit regulation to such online investment services.

Social Trading: This is an interesting development. Imagine that you had an application that allowed you to continuously mimic Warren Buffet’s investment portfolio. You would immediately know whenever he bought a stock, and you could mirror his actions precisely. Well, it’s no fantasy anymore. Today there are websites that offer exactly that. These websites connect the Facebook world to the investment world, and allow users to track other people’s investments in real time, view their investment histories, their successes and failures, and then decide if they want follow their lead. But these ventures also raise questions such as: What responsibility should be imposed on the operator of the service? How much should the regulator intervene in the features of such services, their representations, and their interactions with other parties? Etc…

All these examples aimed at giving an idea on the way securities regulators perceive new innovations. With this in mind, I would like to say a few words on digital currencies. Specifically, …

Blockchain, Bitcoin and ICOs: The market value of all digital currencies that grew in 2017 from about $18 billion to about $300 billion, 16 times more than a year ago, calls for an action.

Needless to say, Blockchain, Bitcoin and ICOs must be distinguished. Blockchain is a legitimate technology that will be a part of our lives. We will adopt it and it will enable us to lower costs for investors.

Bitcoin is a digital payment method whose value seem to be out of control. Its price has characteristics of the Dot-Com bubble at the beginning of the millennium, or, if you will, the "taxi driver" recommendation for investments in the crisis of the '80s and '90s. There isn’t any information on supply and demand, and whether anyone is in control of that supply and demand. It looks like a bubble and behaves like a bubble, as there is no way to explain the price increase from $2,000 to $11,000 within a few months and then sudden drop of 20% within a day, and another increase to $14,000 within a few more days. That does not mean that Bitcoins or alike are not to be considered, but it does mean that it should be examined at country level by all regulators.

By the way, I would like to emphasize that we will not allow companies whose values are based on bitcoin values, such as 'Mashabei Teva' to be included in TASE indices. We will also consider not to allow trading in 'back-door' 'costumes' of bitcoins or alike, on TASE until we find suitable regulatory framework for such instruments.

As for the ICOs (the digital tokens), the story is different. Among others, we have to take into account the fact that ICOs have properties resembling stocks, and that the offering and selling of these currencies may look like traditional IPOs.

I nominated a task force at the ISA that examines the conditions under which an ICO is a security? a currency? a financial instrument? Or a hybrid that we may term as a "coin security"?  Let me explain it…

We are aiming at providing regulatory certainty in the following cases:

  1. We will need to define cases in which ICOs are certainly securities and fall under the securities laws;

  2. We will need to define cases in which ICOs are certainly not securities and therefore are not subject to securities laws.

  3. We will need to define cases in which ICOs are 'coin securities' representing a hybrid of a security and a coin. In such cases we will need to define a new framework within the securities laws that fits these issuances. It could be done through exemptions similar to the Reg A+ in the US. Otherwise, we will need a significant change in the laws to create the right 'outfit' to 'coin securities'.

  4. All other cases will be examined a case by case. We hope to minimize the number of these cases.

The team is expected to submit the report by the end of December. I believe that the issue of issuing digital currencies (tokens) must receive a favorable regulatory approach, perhaps even a courageous one, to deal with the above mentioned challenges.

Thank you.


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