Blockchain for Banking News

Israel will develop a CBDC if the US or Europe commit to issuing

israel shekel CBDC digital currency

On Monday, the Bank of Israel (BOI) released a document outlining the potential scenarios supporting a decision to issue a digital shekel. A positive decision by the US or EU to issue a central bank digital currency (CBDC) would likely encourage Israel to follow suit, as would a situation where the use of cash declined significantly. 

Although the BOI has not yet decided on CBDC issuance, it has debated the circumstances that would enable or support a positive decision. The Bank has identified five factors that could influence a decision on issuing a digital shekel.

Foreign CBDC issuance

First and foremost would be a decision on CBDC issuance by other countries, particularly by the US or EU. Most of Israel’s trade and capital flows are denominated in dollars or euros, so a CBDC that enabled international payments with these economies could significantly improve efficiency. Similarly, if enough countries decided to move ahead and issue a CBDC, this could potentially “tip the scales” and force Israel to “fall in line”. Israel is known for its tech prowess and wants to avoid being a laggard.

Declining cash usage

Another scenario is related to the decline in the use of cash. Although cash is still widely used in the Israeli economy, the report notes that its use has already declined and will likely decrease in the coming years with the continuing adoption of digital payments. The BOI is generally more skeptical than other central banks, which have often downplayed the risk of a tipping point in the near future. It believes that payment habits could change more rapidly than expected and envisages a future when cash usage is no longer cost effective. So CBDCs may become essential to maintain trust in other means of payment and minimize the dependence on private entities. 

Dominant stablecoins

Thirdly, the document notes the risk of stablecoins or other private means of payment dominating the payment system. If a shekel-based stablecoin became widely adopted, there’s the challenge of a lack of interoperability with other types of money, resulting in fragmentation. A heavily used foreign stablecoin is even more problematic to the sovereignty of Israel’s money and payment systems.

The final two factors speak to the risks and opportunities in the domestic payment system. Other countries usually see CBDCs as a tool to force interoperability between payment systems and prevent private walled gardens that become dominant. However, the BOI also sees the digital shekel as a potential competitor that could disrupt specific segments. Similarly, technological developments could deliver efficient and secure platforms for CBDC use, but the full extent of these benefits is difficult to assess at this stage. 

The BOI continues monitoring the development of these aspects in other countries. Last year, the BOI trialed a CBDC blockchain solution that enables privacy. It has also participated in Project Icebreaker, which has looked at the potential of CBDCs for cross-border payments.

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