Home Digital Currencies Bank of Israel calls on fintech innovators to develop CBDC use-cases in...

Bank of Israel calls on fintech innovators to develop CBDC use-cases in new sandbox

Shekel notes and coins: the Bank of Israel is pushing on with its explorations into the possibility of launching a CBDC | Credit: Mike (Pixabay)

The Bank of Israel is continuing its explorations into the possibility of a central bank digital currency (CBDC) by launching a sandbox for the private sector to develop ‘innovative use-cases’.

The deputy governor of the central bank, which is well progressed with a relatively long-running CBDC research programme, announced the plan for the sandbox (test-space) this week in a speech.

Andrew Abir emphasised that a decision has yet to be made to proceed with issuance of a digital shekel and that, like many other nations’ central banks, it is merely getting ready to do so “if and when we find it to be right and necessary”. But he used his speech to announce what he referred to as “another significant project as part of our ongoing analysis” of a potential Israeli CBDC.

“We will build an API-based ‘sandbox’ and invite you – financial entities, fintech companies and indeed anyone who wants – to develop advanced and innovative use-cases that will help us understand how to properly design the digital shekel system so that it can support such use-cases,” Abir said (‘APIs’ stands for application programming interfaces – software intermediaries that allow two machines to interact – and is an abbreviation commonly used by fintech professionals).

“We are now building the system and intend to officially announce the project in the coming weeks, so stay tuned,” he said at the event, which was organised by Israeli business media Globes.

Interest-bearing CBDC

The bulk of Abir’s speech was focused on what he described as “a problem that the digital shekel may assist in solving” – specifically, increasing competition in the banking sector.

The Bank of Israel just last month published a 41-page document titled ‘Logical Architecture for the Digital Shekel System’ that stated that it would ‘support the option for the central bank to have the digital shekel bear interest’.

A CBDC paying interest would be a different approach from many other jurisdictions. For example, UK authorities have stated that a potential digital pound would not pay interest.

In his speech Abir said an Israeli CBDC could “have an impact on competition in the world of deposits” and that it “will be built to be able to pay interest directly on the public’s holdings”.

“Of course, we will need to think about this carefully – for example, by setting it at a lower level than the Bank of Israel policy interest rate, and/or by limiting the types of users who will be eligible for it and the maximum amount on which interest would be paid,” he acknowledged.

In terms of overall CBDC design, the Bank of Israel is considering the introduction of a two-tier model, meaning that people’s access to the CBDC would be via intermediaries in the private sector. The ‘logical architecture’ paper examined various architectures for operationalising such a two-tier model.

RELATED ARTICLE BIS releases ‘game-changing’ blueprint for global financial system – a news story (20 June 2023) whose final section summarised the conclusions of ‘Project Rosalind’ (see final paragraph of section below)

Project Rosalind: ‘inspirational’

About seven months ago the Bank of Israel published results of a CBDC project undertaken alongside the Hong Kong Monetary Authority (HKMA). The findings of ‘Project Sela’, which was co-ordinated by the Bank for International Settlements (BIS) Innovation Hub’s Hong Kong centre and also involved four private companies, were presented in September 2023 in Tel Aviv.

The Sela initiative developed a distributed ledger technology (DLT)-based proof-of-concept (PoC) testing the feasibility of an architecture in which private-sector intermediaries in a two-tier (central bank-private sector) system are ‘exposure-less’ – they provide technological access to the CBDC system, conduct ‘know-your-customer’ (KYC) processes and provide customer services ‘but are not financially exposed at any point of the processes of obtaining, transferring or redeeming CBDC’.

It specifically involved a new type of intermediary – referred to as an ‘access enabler’ – located at the system’s core. An access enabler would handle all customer-facing retail CBDC services without ever ‘holding’ end users’ retail CBDC, thus eliminating the need to hold funds to ensure liquidity or to reduce settlement risk.

Potential future research areas were highlighted in the Sela report. This section included reference to Project Rosalind, an initiative involving the BIS Innovation Hub’s London centre and the Bank of England that concluded in June 2023. In the section of his speech in which he announced the sandbox plan, Abir lauded Project Rosalind, saying that it had “inspired” the Bank of Israel.