Bank of Israel mulls digital shekel to curb tax evasion

Stipulation may be introduced to 2019 budget aiming to cut back on the use of cash; digital currency is one possible way forward, TheMarker reports

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Illustrative photo of Israeli shekels. (Sophie Gordon/Flash90)
Illustrative photo of Israeli shekels. (Sophie Gordon/Flash90)

The Bank of Israel is mulling the launch of the digital shekel to wean the economy off the use of cash, which leads to a flourishing underground economy, a person familiar with the matter said on Sunday, confirming a report by TheMarker financial website.

“For the past few weeks the Bank of Israel has been looking at this matter, which has various aspects to it, including monetary and legal. There are many central banks studying the subject. There is no operative plan at the moment and perhaps there may never be, but it is something the Bank of Israel is studying,” the source said.

The source emphasized that the digital currency would not be the bitcoin, but a digital shekel, a currency supervised by the central bank.

A spokesman from the Bank of Israel declined to comment. A spokewoman for the Finace Ministry referred The Times of Israel to the Bank of Israel for comment.

TheMarker said on Sunday that the Finance Ministry was planning to introduce a stipulation to its 2019 Arrangements Bill, to be presented alongside the budget, that would cut back the use of cash and make it harder to evade taxes.

The so-called black economy in Israel accounts for 22 percent of the nation’s gross domestic product, causing Israel to lose some NIS 50 billion in tax revenues annually, the report said.

Close-up of Israeli currency, Jerusalem. (Orel Cohen/Flash90)

The Finance Ministry move comes after Arab Israeli and ultra-Orthodox MKs stonewalled a less draconian law, formulated and presented to Knesset more than two years ago, that is meant to cut back on the use of cash. Both of these communities — among the poorest in Israel — make use of cash for many of their transactions. That is because they often find it hard to open bank accounts but also because it is an easy way to avoid paying taxes, TheMarker said.

An updated and more stringent version of the law, which the Finance Ministry is planning to introduce into the Arrangements Bill, will not allow salaries to be paid in cash — both to hinder tax evaders and to protect workers’ minimum salaries. The proposal would present a number of options to replace cash, TheMarker said, but the most interesting among them is the proposal to issue a digital shekel.

Sweden’s central bank, the Sveriges Riksbank, issued an interim report in September looking into the possibility of issuing a “digital complement” to cash — the so-called e-kronas. The Swedish central bank envisages two models for this: in the first model the e-krona balance would be stored in accounts in a central database, whereas the second model is more similar to cash, with the value being stored locally in an app or on a card. The solution could also be a mix of the two, the report says. In addition, the choice of technology needs to be investigated, and monetary policy legislation would have to be revised, the interim report said.

Just like cash, but code

In a subsequent online article on Sunday, TheMarker explained that the digital shekel would be exactly like cash, but instead of a coin in your wallet it would be a code in your cellphone. The Bank of Israel would issue the codes, just as it issues the coins. The digital shekel would not be a bitcoin, which is a global currency that is issued by private entities using blockchain technology. It would be issued by the central bank and have the same value as that of a physical shekel. The Bank of Israel would have control over the currency and we’d use the currency by making via cellular payments to each other.

The question of where we would “save” this digital currency is still open, TheMarker said: perhaps users would have to open digital accounts with the central bank or, alternatively, the digital shekels — codes — could be stored in our cellphones and could be lost if the cellphone is lost.

Today digital payments, the ones we already make via our cellphones or with our credit cards, all pass via the clearing systems of the banks or credit card companies. This would change, as digital shekels wouldn’t pass via the clearing system but directly from one cellular phone to the other, just like cash, avoiding fees to banks in these kinds of transactions.

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