As digital advancements continue to reshape the global economy, the Bank of Israel (BOI) has been exploring the potential launch of a digital shekel currency. This move aims to enhance Israel’s payments system and promote innovation within the country. However, despite its commitment to this initiative, the BOI is taking a cautious approach and is unlikely to introduce a digital shekel before other advanced economies.
The push towards digital currencies is not unique to Israel, as countries around the world are considering the adoption of central bank digital currencies (CBDCs). In fact, as of March, 134 nations accounting for 98% of the global economy were exploring digital versions of their currencies with the intention of eventually replacing cash. While some countries like China are in the advanced stages of pilot programs, others, including the US Federal Reserve, are lagging behind.
The BOI began its exploration of a potential CBDC back in 2017, with the primary goal of creating a more efficient payments system. In November 2020, the bank intensified its research and preparatory work for a digital shekel. Collaborating with central banks from Hong Kong, Sweden, and Norway, as well as the Bank for International Settlements, the BOI launched the “Digital Shekel Challenge” to showcase possible use cases for the digital currency. Both fintech and traditional financial companies have been invited to participate in this initiative.
Despite the significant planning and the evolving digital landscape, the BOI remains cautious about the eventual launch of a digital shekel. The current experiment is viewed as an “action plan” to ensure readiness when the bank deems it appropriate and necessary. Deputy Governor Andrew Abir highlighted that while it is likely that a digital euro will be introduced in Europe, the adoption of a digital currency by the public remains uncertain. The BOI is conducting a behavioral study to gauge public acceptance and usage of a digital shekel.
Abir emphasized the potential benefits of a digital shekel, including the ability to pay interest on the currency to incentivize the public to hold it. In a banking system dominated by two major banks controlling over 60% of the market, a digital shekel could level the playing field for payment providers and foster competition with traditional financial institutions. Additionally, a CBDC would mitigate credit exposure risks associated with payment providers holding individuals’ funds temporarily.
Should the BOI decide to launch a digital shekel, it would likely require approval from the finance and justice ministries. However, Abir cautioned that even if the decision is made to implement a digital shekel, it would take time before it becomes ingrained in everyday transactions. The BOI is taking a cautious and strategic approach to ensure the successful integration of a digital shekel into Israel’s financial ecosystem.
The journey towards a digital shekel reflects the BOI’s commitment to enhancing Israel’s payments system and fostering innovation. While uncertainties and challenges lie ahead, the potential benefits of a digital currency are substantial, and the BOI is carefully navigating the complexities of this digital transformation.