Blockchain for Banking News

Israel explores how to enable network effects for its digital shekel CBDC

digital shekel currency cbdc

Today the Bank of Israel published a working paper exploring the potential of creating a network effect to encourage the adoption of its central bank digital currency (CBDC), the digital shekel.

It outlines three key potential triggers to generate a network effect. The government is described as “the largest merchant in the country”. Hence using a digital shekel to pay fines and taxes as well as receive benefits would immediately create adoption at scale. Additionally, the government is Israel’s largest employer, so salaries are another use case.

The second prong of the network effect is a convenient user experience. Consumers should be able to use the same methods they use today, and so should merchants, ideally. For businesses accepting payments, the costs should be lower than current alternatives.

Thirdly, the central bank sees the adoption of the digital shekel for P2P payments as an “accelerant for successful adoption by businesses.” The benefit is that the number of consumer users is exponentially larger than that of merchants. So every consumer that adopts the CBDC will attract multiple other users for P2P payments.

The paper also ponders whether or not to make it obligatory for banks and other payment providers to participate, and likewise for merchants. It explores the rollout of Brazil’s successful Pix system, which obligated larger providers that, in turn, attracted their competitors and smaller players.

Digital shekel use cases

Potential use cases for a digital shekel are considered, including

  • Micropayments
  • Programmable payments
  • Delivery versus Payment (settlement of digital assets) 
  • Internet of Things (IoT)
  • Decentralized Finance (DeFi
  • Metaverse payments

One of the questions is whether to provide these applications or simply enable them, which is considered less work and encourages innovation. On the flip side, it reduces the Bank of Israel’s influence on use cases.

Another highlight of the paper is an intent to support micropayments and high value payments. The latter is quite unusual for a retail CBDC.

In other recent news, the central bank said it would roll out a digital shekel if the US or EU decide to launch their own CBDCs. Israel was also involved in Project Icebreaker, a cross border CBDC initiative with the central banks of Sweden and Norway. It was the first cross border CBDC project to use retail rather than wholesale CBDCs.

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