Israel’s central bank, the Bank of Israel, has announced plans to launch an interest-bearing Israeli shekel central bank digital currency (CBDC). This move comes as part of the country’s exploration of digital currency options since 2021.
Israel’s unique digital shekel design
The digital shekel will adopt a two-tier model, featuring 24/7 instant payments, multipayment support, offline usability, and balance caps. Notably, it will introduce an interest-bearing nature, distinguishing it from other CBDCs.
Additionally, it will separate the role of banks from the provision of wallets and payment services, a novel approach in CBDC design.
In its recent announcement, the Bank of Israel published a paper outlining the logical architecture of the digital shekel. However, some key decisions, such as the utilization of distributed ledger technology, remain pending.
Addressing privacy concerns, the Bank of Israel emphasizes that while it will oversee system operation, it will not have access to personally identifiable information about end users’ balances and transactions.
Unlike traditional CBDC models where users create wallets with banks or payment providers, Israel’s proposed system will leverage open banking APIs. This allows users to open CBDC wallets with payment providers and connect multiple third-party banks for funding or defunding, enhancing accessibility and interoperability.
Centralized database and pseudonymous account balances
A notable feature of the digital shekel is the centralized database of pseudonymous account balance information. While personally identifiable information remains inaccessible to the central bank, it can identify corporate balances.
This database structure enables compliance with holding restrictions and interest applications, providing advantages in managing user types and balance sizes.
Despite the ambitious plans, Israel has yet to commence pilot tests for the digital shekel. The Bank of Israel underscores the complexity of decision-making due to the interdependence of various system components.
Pioneering the future of CBDCs
Notably, last year, the bank cited the potential issuance of a digital shekel in response to increased stablecoin usage, although no substantial adoption had been observed at the time.
Israel’s venture into an interest-bearing CBDC marks a significant milestone in the realm of digital currencies. With unique features such as interest-bearing capabilities and the separation of banking roles, the proposed digital shekel aims to innovate the landscape of CBDCs.
As the Bank of Israel progresses towards its December 2024 target date for a design document, the global financial community eagerly anticipates the unfolding of this pioneering initiative.
By embracing open banking APIs and prioritizing privacy considerations, Israel demonstrates a commitment to inclusivity and security in its digital currency framework. As discussions surrounding CBDCs continue to evolve, Israel’s approach presents a compelling case for the integration of innovative features and transparent design processes in shaping the future of digital finance.
