The Bank of Israel (BOI) just published a report last Monday discussing the potential circumstances that could lead to the issuance of a digital shekel, which would serve as Israel’s central bank digital currency (CBDC). The bank identifies the crucial factors that could influence its decision to green-light the project.
The Possibility of Foreign CBDC Issuance
According to the BOI’s press release, one factor that could influence its decision to roll out the digital shekel is the pronouncement of other countries, specifically the US or the EU, to issue their own CBDCs. Based on the report, the issuance of a CBDC could improve efficiency in international payments with economies such as the US and EU since most of Israel’s trade and capital flows use dollars or euros.
In other words, if multiple countries adopt a CBDC, it could create pressure on Israel to issue one as well.
Decreasing Cash Usage
The report also indicates that the use of cash has already declined in Israel and is expected to decline further in the future, with digital payments becoming more widespread. According to the BOI, payment habits could change more quickly than anticipated, leading to a future where cash usage is no longer practical.
In this scenario, CBDCs may become necessary to sustain trust in other payment methods and reduce dependence on private entities.
The Risk of Dominant Stablecoins
Another factor that could influence the issuance of a digital shekel is the risk of stablecoins or other private payment methods dominating the payment system. If a stablecoin based on the shekel becomes widely adopted, it would not be interoperable with other types of money, resulting in fragmentation.
In this context, the dominance of a foreign stablecoin could further threaten the sovereignty of Israel’s payment systems.
Risks and Opportunities in the Domestic Payment System
The last two factors discuss the advantages and disadvantages of the domestic payment system. The issuance of CBDCs can aid in enabling different payment systems to interoperate with each other and avert private walled gardens from becoming prevalent. On the other hand, the BOI also sees the digital shekel as a potential disruptor in certain segments of the industry.
Lastly, while present technological advancements are projected to provide efficient and secure platforms for CBDC use, the extent of these benefits is somehow challenging to forecast at this point in time.
Final Thoughts
While the BOI has not yet made a decision with regard to the issuance of a digital shekel, the report highlights the circumstances that could enable or support such a decision. The bank is closely watching the development of CBDCs in other countries and has tested a CBDC blockchain solution that guarantees privacy. As digital payments continue to become more prevalent, the issuance of a digital shekel may become increasingly necessary to maintain confidence in other payment methods and minimize dependence on private entities.
In summary, the BOI is exploring various factors that could influence the issuance of a digital shekel. However, the report emphasizes the need for interoperability and trust in payment methods to minimize dependence on private entities and safeguard the sovereignty of Israel’s payment systems. As CBDCs become more mainstream on a global scale, the BOI may be compelled to issue a digital shekel to remain competitive and maintain the nation’s financial stability.