Netanyahu’s crypto bet signals a dangerous readiness to accept economic isolation

Just a few days before the national election, Prime Minister Benjamin Netanyahu on Friday proposed using cryptocurrency and blockchain technology to bypass much-feared international sanctions and help shield Israel from economic isolation.

Even a rare rebuke by the Bank of Israel that cryptocurrency “cannot be used as a route for bypassing sanctions” did little to sway Netanyahu, who said he was taking the bank’s position into account, but would do what he believes is best.

The warnings are not coming from the central bank alone. Netanyahu’s proposed contingency plan also drew fierce criticism from more than 100 senior economists, business executives, and former public service officials, who accused the current government of knowingly leading Israel toward international economic boycott and isolation, which could cause “irreversible damage,” and undermine Israel’s ability to finance its security needs.

The Economists’ Forum, which includes former senior officials in the Bank of Israel and Nobel Prize laureates, cautioned that Netanyahu’s mere acknowledgement that Israel needs to brace for potential banking sanctions is already causing harm. The suggestion that Israel could evade potential international restrictions by Western countries is bound to deter investors from parking much-needed funds in the country. Such an environment will only deepen the country’s isolation and trigger a ripple effect threatening to paralyze the economy and harm citizens, the forum of economic experts and business leaders warned.

“The Israeli banking system, corporations, exporters, and investors, and above all, the high-tech sector, the economy’s engine of growth, would be unable to function,” they predicted. “Foreign investments will vanish entirely, unemployment will surge, and Israel’s global economic standing will collapse.”

Clearly, Netanyahu’s suggestion to use cryptocurrency to evade potential international sanctions by Western countries raised a troubling issue that goes far beyond the technical feasibility of such a scheme.

With the remarks, Netanyahu acknowledged the bleak prospect that Israel may face broader economic restrictions severe enough to threaten its access to the global financial system, and that the country should prepare to live with the consequences. Rather than offering a credible plan to head off economic isolation, Netanyahu appeared to be signaling that if re-elected on October 27, his government will not change policy course to prevent sanctions and instead will seek solutions to bypass them.

Netanyahu’s comments came amid mounting pressure by Western countries to impose sanctions over the government’s policy towards Israeli West Bank settlements and criticism over the handling of rising settler violence. In response to a wave of settler attacks on Palestinians and massive settlement construction approved by Netanyahu’s hard-right government, the UK last month announced a ban on trade with Israeli settlements, and 12 Western countries announced similar plans to impose or support restrictions.

“What’s worrying is the fact that Netanyahu expressed that the sanctions are a scenario that we are going to have to deal with, which is suggesting that the current government is not going to do anything different,” Gali Ingber, head of finance studies at the College of Management Academic Studies, told The Times of Israel. “So, the message is that if countries want to sanction Israel, then a Netanyahu-led government will find ways to deal with that, instead of understanding what it can do differently to rein in settler violence and through diplomacy prevent economic isolation from Israel’s most important trading partners.”

“Israel is a modern and advanced economy that can’t survive and prosper on its own,” said Ingber.

Similarly worried, the Bank of Israel, acting as an adviser to the government, urged decisionmakers to do the “right thing” for Israel’s economy by preserving sound economic ties with main trading partners and focusing on preventing sanctions.

“This issue is within the responsibilities of the political echelon, and it should act to advance it,” the central bank demanded.

While the UK-led sanction package is initially aimed only at those facilitating activity beyond the Green Line, the worry is that the measures could ultimately be extended to companies and banks inside Israel’s pre-1967 borders, given the difficulty of separating their activities and supply chains from the West Bank.

With no policy change in sight or diplomatic efforts in place, sanctions could fall on Israeli banks, nearly all of which provide services to clients over the Green Line, whether financing public works or offering mortgages for settlement homes. Israelis could find themselves cut off from the global financial system, due to banks preferring to avoid the hassle of complying with requirements that they avoid individuals or businesses with settlement ties.

Netanyahu’s suggestion that Israel needs to develop an “alternative economic” system that would include cryptocurrency to prepare for sanctions assumes an extreme scenario in which Israel could face restrictions on its access to the international financial messaging network banks use to communicate cross-border payment instructions.

Cryptocurrency — a decentralized digital payment system that does not rely on central government authorities — can weaken the effectiveness of financial sanctions by creating alternative payment channels to facilitate some transactions outside conventional banking channels. However, digital currencies are not a foolproof solution, as transactions on many blockchain networks are transparent and can be traced.

“It’s not possible to circumvent sanctions with digital currencies as the blockchain system is publicly open and transparent, which means that every transfer is registered and can be traced to its origin,” said Ingber. “If Israel is sanctioned, then no company or bank in Europe, the US or any other place will probably be willing to openly do business with Israel and participate in an alternative payment scheme.”

Hence, the use of digital currencies and distributed-ledger systems is not a solution for access to global banks, suppliers, customers, or investors when governments and financial institutions are required to comply with sanctions that might be imposed on Israel, Ingber explained. As an advanced, modern country with an economy that relies on international trade, foreign investment and global financial connections, Israel can’t simply replace those relationships with a parallel alternative system.

“Investors in Europe and elsewhere will distance themselves because they don’t want to be identified as doing business with a country that has been sanctioned amid concerns that they could be facing fines,” said Ingber. “If Israel is going to be sanctioned and disconnected from the global economy, the high-tech industry, which is the main growth driver of the economy, will not be able to continue and exist in the country.”

Much of the resilience of Israel’s economy despite three years of war with Hamas was driven by the prowess of its tech sector, a pillar of the economy that contributes about 20% of local GDP, makes up about 50% of total exports, and generates significant tax revenue. The Israeli tech industry is highly reliant on foreign capital, as about 80% of venture capital investments in local tech startups are generated from foreign funds.

Ingber cautioned that the damage may begin well before any sanctions are imposed, as Netanyahu’s remarks alone could influence investment decisions. Investors assess not only a country’s current economic performance but also the risks surrounding its future.

For multinational companies, that raises questions about whether to expand research and development operations in Israel, establish new subsidiaries or commit capital to long-term projects. For entrepreneurs, it may strengthen the case for building their businesses elsewhere.

“Tech companies and entrepreneurs will move abroad and register in the US or in Europe, leading to unemployment and the disappearance of a large part of taxes paid by tech employees and corporations, which in turn will impair the state’s ability to reduce debt and fund public services for citizens,” said Ingber. “We are already seeing doctors and engineers leaving as they have alternatives abroad to make a good living for themselves and their families.”

“The Israeli economy can’t survive and prosper as it does right now if this is where we are heading — it will throw us back 40 or 50 years, to times when there was no high-tech and the economy was in bad shape,” said Ingber.