Today the Bank of Israel published a preliminary design document for the digital shekel, its central bank digital currency (CBDC). While no decision has been made to go ahead, the central bank previously stated that if Europe proceeds with a CBDC, it is more likely to move forward. However, it will require some regulatory changes. The design document, even though it’s 136 pages, is quite high level, so at this stage it is technology-agnostic.
Six motivations for a potential digital shekel were outlined. The central bank has previously complained about the lack of competitiveness of banks, so competition is a key driver. Other purposes include:
- driving innovation
- creating a redundant payment system
- supporting cross border payments
- offering greater privacy for digital payments and
- combatting the black economy.
Many CBDCs share common features, so we’ll focus on the ones that are a little different.
Digital shekel differences
One that has been mentioned before, is that the digital shekel will pay interest. This potentially makes it a bigger threat to banks in attracting deposits away, but it depends on how it’s used. Previously the central bank complained that banks failed to raise deposit rates after the central bank increased interest. So perhaps it will offer higher rates only when it thinks the banks need to move theirs.
Many central banks impose holding limits on CBDCs. This is a topic of debate in Europe, where lower holding rates will protect banks from losing deposits but make it less convenient for CBDC users if money has to be repeatedly swept in or out of bank accounts. The Bank of Israel said it has run simulations that sound like they will support large limits. For example, large enough for companies to be able to use it to pay the entire monthly payroll.
The payment sizes will range from micropayments to very high value payments. That leads on to another point: the target market. The digital shekel will be a multipurpose CBDC, so it caters for both retail use cases and wholesale or interbank applications. On the retail side, children and foreigners, including tourists, will be able to participate.
Like many other CBDCs, it will be a two tier system, so that the central bank does not interact directly with consumers or companies. In Europe there will be payment service providers, but Israel envisages three sets of intermediaries. In addition to payment service providers who provide the access, presumably via wallets, there are also funding institutions (mainly banks) and additional service providers (ASPs). The latter will provide added value functionality like budget management or advanced payments. We assume one organization can optionally take on multiple roles.
Privacy
Privacy is always a key topic for CBDCs. The central bank won’t have access to private information, both by law and by technical design. Only the payment service provider will see personally identifiable information, but they will be banned from using it for commercial purposes.
In Europe, the digital euro will allow small anonymous transactions when conducted offline. Israel has similar plans, but it also wants to support small anonymous transactions online. Hence, while the CBDC will be more private than other digital payments, it will be less private than physical cash.
A key purpose of the report is to attract feedback from interested parties.
With the document’s publication, the central bank now moves to the next phase of work in 2025 and 2026. This involves conducting an economic analysis of the impact of the digital shekel and exploring the technical options. Then it needs to start working on regulatory requirements, draw up a roadmap and draft a recommendation for the Governor of the Bank of Israel on whether to issue a digital shekel.
