A digital shekel is a proposed form of central bank digital currency (CBDC) that would be issued by the Bank of Israel, the country’s central bank. A CBDC is a digital representation of a sovereign currency that is backed by the central bank and can be used for payments, settlements, and other functions. Unlike cryptocurrencies, which are decentralized and operate on blockchain networks, a CBDC would be centralized and regulated by the issuing authority.
A digital shekel would aim to create a more efficient, secure, and inclusive payment system in Israel, as well as to enhance the country’s competitiveness in the global digital economy. A digital shekel would also provide an alternative to physical cash, which has been declining in use due to the COVID-19 pandemic and the rise of digital payment platforms.
Why is Israel considering a digital shekel?
The Bank of Israel has been exploring the potential benefits and challenges of issuing a digital shekel since 2017, when it established a research team to study the topic. In November 2021, the bank announced that it had stepped up its preparations for a possible launch of a digital shekel, citing the need to improve the country’s payment systems and to keep up with the global trends in digital innovation.
The bank has also been conducting experiments with other central banks and international organizations to test the feasibility and interoperability of a digital shekel. For example, the bank has participated in a joint project with the Hong Kong Monetary Authority and the Bank for International Settlements (BIS) called Sela, which demonstrated the possibility of cross-border payments using CBDCs. The bank said that the Sela project showed that a retail CBDC could combine accessibility, competition, and preventive cyber security while retaining key advantages of physical cash.
The bank’s governor, Amir Yaron, said that given the rapid digitalization of the economy, working on a CBDC makes sense and noted that Israel has closed the gap with other countries in its CBDC explorations. He also stressed that if Israel opts for a digital shekel, it would provide at least as much privacy as digital means of payments and maybe even a higher level.
What are the challenges and risks of a digital shekel?
Despite its potential benefits, a digital shekel also poses some challenges and risks that need to be carefully addressed before its implementation. Some of these include:
- The impact on monetary policy and financial stability: A digital shekel could affect the demand for money, the transmission of interest rates, and the role of commercial banks in the financial system. The bank would need to ensure that a digital shekel does not undermine its ability to conduct monetary policy and maintain financial stability.
- The legal and regulatory framework: A digital shekel would require a clear and comprehensive legal and regulatory framework that defines its status, rights, obligations, and liabilities. The bank would need to coordinate with other authorities and stakeholders to establish the appropriate laws and regulations for a digital shekel.
- The technological and operational aspects: A digital shekel would require a robust and resilient technological infrastructure that ensures its security, reliability, scalability, and interoperability. The bank would need to choose the optimal design and architecture for a digital shekel system that meets its objectives and standards.
- The public acceptance and adoption: A digital shekel would depend on the public’s trust and willingness to use it as a means of payment. The bank would need to educate and inform the public about the features and benefits of a digital shekel and address any concerns or misconceptions.
What is the timeline for a digital shekel launch?
The Bank of Israel has not yet made a final decision on whether or not to issue a digital shekel. The bank’s governor said that it is still an open question, as it is in most if not all other advanced economies. He added that the bank remains committed to be at the frontier of CBDC research and development, as well as to modernize and advance its payment systems.
The bank has not announced any specific timeline or roadmap for a digital shekel launch. However, some media reports have suggested that it could take place within three to five years if approved by the government. The bank has also indicated that it would conduct public consultations and pilot programs before introducing a digital shekel to ensure its readiness and suitability.
