The Bank of Israel is seeking a public response to their draft document “A Bank of Israel Digital Shekel – Potential Benefits, Draft Model, and Issues to Examine”; regarding the potential future issuance of a digital currency by the Bank.
Although the Bank of Israel has been examining the issue of central bank digital currencies (CBDC) since 2017, they have not yet decided whether a digital shekel will be issued. But in light of the rapid developments in the digital economy and in payments, and in view of the major central banks’ work on the issue, the Bank of Israel is accelerating its research and preparation for the potential issuance of a digital shekel.
A digital shekel could generate various benefits for the Israeli economy, but issuing it also involves risks. The Bank of Israel 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.
The document outlines, in general terms only, a draft model of a Bank of Israel digital currency. This draft does not represent any Bank of Israel decision regarding the characteristics of a digital shekel should any be issued. The draft model is the basis for a discussion and for examination of alternatives by the work teams involved in the matter at the Bank of Israel. Following the publication of this document, it will also serve as the basis for discussion within the professional community in Israel regarding the necessary characteristics of a digital shekel.
In recent years, there have been significant and very rapid changes in the payments market in Israel and abroad. While no central bank in an advanced economy has yet announced a decision to initiate a project that would lead to the central bank issuing a digital currency, there has recently been an apparent change in global sentiment on the matter. Central banks, including those of the major economies, have significantly increased theoretical research and practical examination of the possibility of issuing a central bank digital currency (CBDC) as a means of payment that would serve the general public alongside the existing means of payment.
In view of these developments, the Bank of Israel has decided to accelerate its learning, research, and preparation leading to the potential issuance of a Bank of Israel digital currency in the future. It is important to emphasise that similarly to many other central banks, the Bank of Israel has not yet decided whether it intends to issue a digital currency.
The Bank of Israel is just in the process of preparing an action plan, so that if conditions develop in the future that would 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 such a plan into action.
For this purpose, and as part of the Bank of Israel’s strategic plan, the Bank of Israel Governor established a Steering Committee on the Potential Issuance of a Digital Shekel, led by the Bank of Israel’s Deputy Governor. The Steering Committee established a number of working groups from among professionals in various fields within the Bank, through which it is mapping the potential advantages, various issues, and risks involved in a potential issuance of a digital shekel.
While central banks may use distributed ledger technologies (DLT) such as blockchain when designing and establishing CBDC systems, there are essential differences between a CBDC and cryptocurrencies such as bitcoin. First and foremost, while cryptocurrencies do not belong to any specific country and some are characterised by having no central authority to manage them, a CBDC will be issued by the country’s central bank, and it is the central bank that would determine its quantity, its manner of use, and the regulation that will apply to it.
In discussing a potential project of issuing a CBDC, we must ask ourselves first and foremost – “why?” What benefits would the Israeli economy derive from the existence of a digital shekel, and what needs would it answer? The Bank of Israel’s Steering Committee has mapped the advantages that a Bank of Israel digital currency may generate for the Israeli economy if it were to be issued in the future. The main motivations that may lead to a decision to issue a Bank of Israel digital currency are:
- Creating another efficient, advanced, and secure alternative to the existing and new means of payment in the digital age.
- Creating an innovative technology that will ensure the adaptation of the payment system to the needs of the future digital economy.
- Ensuring adequate redundancy of the payment system and its proper functioning during emergencies or breakdowns.
- Creating an efficient and inexpensive infrastructure for cross-border payments.
- Maintaining the public’s ability to use digital means of payment while ensuring a certain level of privacy.
- Support of government policy to reduce the use of cash in the struggle against the “shadow economy”.
It’s important to note 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. A large part of the Steering Committee’s work is focused on research on these topics and on an examination of the added value that a Bank of Israel digital currency could generate for the Israeli economy over the existing and future payment systems.
In order to examine the various implications of a potential issuance of a Bank of Israel digital shekel, and in order to analyse the business and technological challenges and opportunities, the Steering Committee set out, in general terms only, a draft model for a Bank of Israel digital currency. The draft model forms the basis for a discussion and examination of alternatives by the working teams dealing with the matter at the Bank of Israel. Following the publication of this document, the bank intends that the draft model will also serve as the basis for a discussion in the professional and academic communities in Israel regarding the necessary characteristics of a digital shekel.
The objective of this publication is to update the professional community – the payments, finance, and technology sectors, academia, relevant government agencies, and various organisations – regarding progress in the Bank of Israel’s examination of CBDC. In order for the action plan that the Bank of Israel is preparing to be as informed and comprehensive as possible, it will be important for the Bank of Israel to track the thinking that will develop among various entities in the Israeli economy, even if it is decided in the end not to put the plan into action. The Bank of Israel calls on these entities to provide it with written comments on the contents of this document and on the relevant aspects of a possible future issuance of digital currency by the Bank of Israel.