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How Israel Can, and Should, Become Ground Zero for Bitcoin

How Israel Can, and Should, Become Ground Zero for Bitcoin

Michael Eisenberg is a partner at early-stage venture capital fund Aleph. A key figure in Internet and software investing in Israel, he currently resides in Jerusalem and lectures on entrepreneurship at Hebrew University.

Here, he makes a case for Israel as a potential hub for digital currency innovation.


This week, the US Internal Revenue Service (IRS) handed Israel a golden opportunity on a silver platter. Or, shall I say, a virtual gold opportunity. By deciding to tax bitcoin as an asset, like gold, the US Government effectively doomed bitcoin as a currency.

As Robinson Meyer correctly writes in The Atlantic:

“To tax bitcoin as property … destroys its fungibility: one bitcoin can no longer be exchanged for another …This was one of the original intents behind the service. Bitcoin aimed to function as a kind of digital money, meaning it had to work as a unit of account, a medium of exchange, and a store of value.”

To be clear, this does not doom bitcoin. The protocol and architecture of the block chain-based ledger will still enable endless disruption of existing industries.

However, it does cripple some of the nascent US-based entrepreneurial efforts to boost bitcoin-based commerce until the currency abstraction layer arrives on top of the bitcoin block chain. This Chamath Palihapitiya tweet is instructive in that regard:


Meyer, quoting Prof. Levitin of Georgetown, points out just how complex this tax treatment is for the common man:

“The price at which a particular bitcoin was acquired (and this is traceable) determines the capital gains on that particular bitcoin when spent. If I spend bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend bitcoin B, which I bought at $390. […] This means bitcoins are not fungible, and that makes it unworkable as a currency.”

I believe this opens the door for another jurisdiction, with appropriate regulatory and tax regulations, the right technology ecosystem and interested entrepreneurs to become the epicentre of bitcoin and virtual currency innovation. Israel should become exactly that place.

Israel is currently working on its bitcoin regulatory framework. The Bank of Israel and Israeli Tax Authorities should treat bitcoin as a currency and apply sure but light regulation. They should not, as Professor Danny Tziddon suggested at our Aleph Bitcoin event, simply follow the US Federal Reserve or government.

The Israeli regulators should “zag” where the US “zigged”. They should take a simple approach and not the United States’ complex approach. This would increase the velocity of bitcoin purchased by Israelis by making it a medium of exchange.

That increased velocity, and hence use, would also speed up the innovation around bitcoin, its protocol and the general commercial applications of virtual currency in Israel. Critically, it will also attract global bitcoin entrepreneurs to Israel.


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This entry was posted on March 31, 2014 by and tagged .

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