Israel holding off on digital shekel until other advanced economies launch currencies

Currency innovation still being researched; convincing public to adopt it could streamline payments system, puncture Israel’s banking duopoly, says BOI deputy governor

View of the Bank of Israel's main offices in Jerusalem, January 2, 2023. (Yonatan Sindel/Flash90)
View of the Bank of Israel's main offices in Jerusalem, January 2, 2023. (Yonatan Sindel/Flash90)

Reuters — The Bank of Israel remains committed to plans for a digital shekel currency to improve Israel’s payments system and foster innovation, but is unlikely to launch one ahead of other advanced economies.

“We’re all waiting for the first Western central bank to pull the trigger, which is almost certainly going to be the European Central Bank. And then you may see a rush of countries going forward with it,” Bank of Israel Deputy Governor Andrew Abir told Reuters.

As of March, 134 countries — representing 98% of the global economy — were exploring digital versions of their currencies, which would eventually replace cash. Some countries, such as China, are in advanced stages of pilot programs, while the United States Federal Reserve is lagging.

The BOI first began looking into a possible central bank digital currency, or CBDC, in 2017 as a way to create a more efficient payments system. The central bank stepped up its research and preparation in November 2020.

The bank has been experimenting with a digital shekel along with its Hong Kong, Swedish and Norwegian counterparts, as well as the Bank for International Settlements. The BOI has invited companies from both traditional finance and financial technology, or fintech, to participate in its project, known as the “Digital Shekel Challenge,” to demonstrate possible use cases.

Despite the planning and an increasingly digital global economy, the BOI still says it cannot be sure it will ultimately launch a digital shekel. Its experiment is considered an “action plan” to be ready when the bank deems it appropriate and necessary.

Similarly, the ECB has said it is likely, but not inevitable, that a digital euro would be introduced in Europe, which depends on cross-border payment services from elsewhere, particularly US giants Visa and Mastercard.

“The big question is whether the public will adopt a digital currency,” Abir said, adding that the BOI is doing a behavioral study on the subject.

“There’s a big jump from some study to persuading people to use it. You have to have a good set of use cases.”

A man walks past a statue of the Euro sign in the hallway of the European Central Bank in Frankfurt, Germany, June 6, 2024. (AP Photo/Michael Probst)

Questions over take up

Abir wants an eventual digital currency to pay interest to create competition with bank deposits and provide an incentive for the public to hold it.

Israel’s banking system is highly concentrated, with two large banks dominating more than 60% of the market.

“The main incentive for us is to create a level playing field for payment providers and allow them to compete with the banks,” he said.

“An advantage of a CBDC is that the payment provider does not hold your money so you don’t [have] a credit exposure to that company,” Abir added. “This allows a lower level of supervision and capital requirement than a traditional payments provider that holds your money, even for brief moments in time.”

Bank of Israel chief Amir Yaron, left, gives Prime Minister Benjamin Netanyahu the central bank’s year-end report in Jerusalem, March 28, 2024. (Amos Ben-Gershom/GPO)

A digital shekel, Abir said, will allow the public to pay with the central bank’s money “everywhere and in any transaction we choose.”

Should the BOI decide to launch a digital shekel, it would most likely need approval from the finance and justice ministries.

“It will take time before it enters all of our lives if we decide to implement it,” Abir said. “But it has the potential to be the next revolution in payment systems.”

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