The Bank of Israel (BOI) is actively pursuing plans to introduce a digital shekel in order to enhance Israel’s payment system and encourage innovation. While the concept of a central bank digital currency (CBDC) has been on the radar since 2017, the BOI intensified its efforts in November 2020. The bank has been collaborating with other central banks, such as those in Hong Kong, Sweden, and Norway, as well as the Bank for International Settlements, to explore the potential of a digital shekel. The “Digital Shekel Challenge” has been launched to engage both fintech and traditional financial institutions to showcase possible applications.
According to Bank of Israel Deputy Governor Andrew Abir, over 134 countries – representing 98% of the global economy – are considering digital versions of their currencies to eventually replace cash. While some countries like China are at an advanced stage of pilot programs, others like the U.S. Federal Reserve are lagging behind. Abir suggests that the launch of a digital currency by the European Central Bank (ECB) may trigger a domino effect, prompting other countries to follow suit.
Despite the progress made in researching and experimenting with the digital shekel, the BOI remains cautious about the actual implementation. There are concerns around public adoption and usage, as well as the need for compelling use cases to drive acceptance. Abir emphasizes the importance of paying interest on a digital currency to incentivize public participation and create competition with traditional bank deposits. The concentration of Israel’s banking sector in the hands of a few major players is also a driving factor behind the push for a digital shekel.
If the BOI decides to move forward with a digital shekel, approval from the finance and justice ministries would likely be required. Additionally, there are considerations around the oversight, supervision, and capital requirements associated with a digital currency. Abir envisions a digital shekel that allows for transactions anywhere and encourages broader adoption among the public. However, he acknowledges that the process of implementing a digital currency will take time and careful consideration.
The journey towards a digital shekel in Israel represents a significant step towards modernizing the country’s payment system and fostering innovation in the financial sector. While there are challenges to overcome and regulatory hurdles to navigate, the potential benefits of a central bank digital currency are compelling. The BOI’s commitment to exploring this new frontier underscores its vision for a more efficient and competitive financial ecosystem in Israel.