Israel’s central bank is to launch a consultation on the potential issuance of a central bank digital currency (CBDC).
The Bank of Israel has published an assessment of its latest thinking on the introduction of a digital shekel, accompanied by a call for responses, saying that it wants to be fully prepared should a decision be made to proceed with implementation.
Its publication, entitled ‘A Bank of Israel Digital Shekel – Potential Benefits, Draft Model and Issues to Examine’, explores the questions and challenges that it wants to resolve.
The document sets out a draft model of a potential digital shekel to form ‘the basis for a discussion and for examination of alternatives’. It does not state a current preference for any specific technological avenue.
It goes on to say that the central bank is ‘preparing an action plan so that if conditions develop in the future that lead to a Bank of Israel assessment that the benefits of issuing a digital shekel outweigh the costs and potential risks, the Bank of Israel will be prepared to put this plan into action’.
Technology route to be determined
With a group of leading central banks having identified the ‘foundational principles’ required for CDBCs in October 2020, focus is increasingly turning to the technology that would help deliver them. Global Government Fintech tackled precisely this topic three weeks ago (22 April) during a webinar held in partnership with Amazon Web Services Institute entitled ‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’.
The Bank of Israel’s draft CBDC design assumes a partnership between the public- and private-sector (for example, banks, credit-card companies and technology and/or finance companies from Israel and abroad) – a ‘two-tier’ approach to CBDC with the private sector developing applications on top of the Bank of Israel’s infrastructure.
The central bank sets out that tech-based innovation such as ‘programmable money’ and smart contracts, as well as micro-payment interfaces and payments in the Internet of Things (IoT) environment, would be created and carried out by payment service providers, for example.
The model does not determine whether its potential CBDC system would be based on distributed ledger technology (DLT) or central database technology.
‘On both levels – between the Bank of Israel and the payment service providers, and between them and the customers – the system could be based on an account-based model or a token-based model,’ the 40-page document goes on to say.
Payment would be enabled not only through smart-phones, ‘but also through a variety of means, including simple devices’, while offline payments would also be enabled ‘at least in a limited form’, it also notes.
‘Apparent change in global sentiment’
Most central banks worldwide are researching or experimenting with CBDCs but few have made definite commitments to introduce them.
The Bank of Israel, which has been exploring the possibilities of CBDC since November 2017, says it is now ‘accelerating its research and preparation for the potential issuance of a digital shekel… in view of the rapid developments in the digital economy and in payments, and in view of the major central banks’ work on the issue’.
It points out that ‘there has recently been an apparent change in global sentiment on the matter’ – a reference to the momentum that seems to be building in favour of introducing CBDCs. At present barely a day seems to pass without a central bank setting out their CBDC status – this week, for example, Global Government Fintech has reported on updates from Haiti, Georgia and Kazakhstan.
The Bank of Israel cites the creation of an efficient and inexpensive infrastructure for cross-border payments and support of government policy to reduce cash use in a bid to tackle the ‘shadow economy’ as among the motivations that may lead to the issuance of CBDC. But the central bank notes that ‘some if not all’ of the potential benefits may be obtainable through the improvement and upgrading of the existing payment systems, and not necessarily through a digital currency.
‘A Bank of Israel digital currency, if one is issued, will have to win public trust to the same extent that cash has, so the system will have to be designed and built to meet the highest business and technological standards,’ it adds.
The consultation will run from 18 May to 31 July and the central bank plans to publish the main findings of its analysis.
PM Benjamin Netanyahu declared a state of emergency in the city of Lod yesterday as hostilities between Israel and militant group Hamas escalated. The UN’s Middle East peace envoy, Tor Wennesland, warned today (12 May) that the situation is “escalating towards a full-scale war”.