(June 24, 2021) The Bank of Israel (BOI), Israel’s central bank, has decided to accelerate its research and preparation for the potential issuance of a digital shekel (central bank digital currency (CBDC)). In a press release issued on May 11, 2021, the BOI announced that it was preparing an action plan for issuing an Israeli CBDC. The plan would be implemented if, according to the BOI’s assessment, the benefits of issuing a digital shekel outweighed the costs and potential risks.
To accelerate the process, the BOI released a document, Bank of Israel (BOI) Digital Shekel – Potential Benefits, Draft Model, and Issues to Examine (draft model), and invited the professional community—namely, the payments, finance, and technology sectors; academia; relevant government agencies; and various organizations to submit written comments on the draft model to enable further examination and discussion of various relevant aspects.
Potential CBDC Benefits
According to the BOI Steering Committee on the Potential Issuance of a Digital Shekel, among the main motivations that may lead to a decision to issue of a CBDC are:
a. Creating another efficient, advanced, and secure alternative to the existing and new means of payment in the digital age.
b. Creating an innovative technology that will ensure the adaptation of the payment system to the needs of the future digital economy.
c. Ensuring adequate redundancy of the payment system and its proper functioning during emergencies or breakdowns.
d. Creating an efficient and inexpensive infrastructure for cross-border payments.
e. Maintaining the public’s ability to use digital means of payment while ensuring a certain level of privacy.
f. Support of government policy to reduce the use of cash in the struggle against the “shadow economy.”
The BOI recognized, however, that “some if not all of these benefits may be obtainable through the improvement and upgrading of the existing payment systems, and not necessarily through the issuance of a Bank of Israel digital currency. In addition, the issuance of a CBDC may involve risks.”
Draft Model and Issues to Examine
The draft model proposes “a two-tier system” in which the BOI will provide digital shekels to private sector “payment service providers,” such as banks, credit card companies, fintech firms, or international or domestic technology and/or financial firms that meet the legal and regulatory requirements established by the BOI and other authorities. Payment service providers will “manage the required interfaces with millions of households, conduct the necessary examinations as part of the money laundering prohibition rules, provide the necessary consumer services, and develop advanced capabilities and innovative user interfaces in a competitive environment.”
The draft model suggests that the system will enable easy and efficient future adaptation to new technological developments. While “the payment interface may operate similarly to those of cellular payment applications … in order for the digital shekel to cover various business uses, it will need to have a wide variety of features and capabilities that will require additional payment interfaces.”
The draft model proposes that the digital shekel “will be designed in keeping with the money laundering prohibition rules and in a way that will not harm the government’s efforts to collect taxes. Therefore, in contrast with cash, it will not be possible to enable absolute privacy of the payer or the receiver.” The draft model also notes that the extent of users’ privacy vis-à-vis payment-service providers and, with regard to commercial use, whether providers will be permitted to make of users’ information will be determined later.
Economic characteristics of the digital shekel, such as making simple payments at negligible or no cost, are also listed among the proposals contained in the draft model.
The Steering Committee listed several economic and technological issues and posed a number of questions regarding the payment system in an effort to solicit input from the public.
Internal BOI Pilot Run of the Digital Shekel
The BOI has reportedly adopted ethereum technology for an internal pilot run of the digital shekel. In the experimental environment, the bank issued tokens representing digital shekels and established digital wallets. According to Globes reporter Guy Ben Simon, the system allows for immediate payment upon completion of the transaction and delivery of the product or service, without the involvement of intermediaries such as banks. “The issue of privacy has not yet been determined, but it is clear that the digital shekel will adhere to the rules of money laundering,” said Ben Simon.