By Stephen Sher
JERUSALEM (Reuters) – The Bank of Israel remains committed to its plans to issue a digital currency to improve Israel’s payments system and boost innovation, but it is unlikely to launch it before other advanced economies.
“We are all waiting for the first Western central bank to make the decision, which will almost certainly be the European Central Bank. And then we may see a group of countries move forward with this,” Bank of Israel Deputy Governor Andrew Abir told Reuters.
By March, 134 countries representing 98% of the global economy were exploring digital versions of their currencies, which would eventually replace cash. Some, such as China, are in advanced stages of pilot programs, while the US Federal Reserve lags behind.
The Indian investment bank first began researching a potential central bank digital currency (CBDC) in 2017 as a means of creating a more efficient payments system and intensified its research and preparations in November 2020.
The bank has been piloting the digital shekel in collaboration with its counterparts in Hong Kong, Sweden and Norway, as well as the Bank for International Settlements. It has invited both fintechs and traditional financial companies to participate in its project, known as the “Digital Shekel Challenge,” to demonstrate potential use cases.
Despite the planning and the growing global digital economy, the Bank of Israel still says it cannot be certain that it will eventually launch a digital shekel. Its experiment is a “work plan” ready for when the bank deems it appropriate and necessary.
Similarly, the European Central Bank said it was likely, but not inevitable, that a digital euro would be introduced in Europe, which relies on cross-border payment services from elsewhere, particularly US giants Visa and Mastercard.
“The big question is whether the public will adopt the digital currency,” Abir said, adding that the investment bank is conducting a behavioral study on the subject.
Questions about taking it
“It’s a big leap from a few studies to getting people to use it. You have to have a good set of use cases.”
Abeer wants to eventually issue a digital currency that pays interest in order to create competition with bank deposits and provide an incentive for the public to hold them.
The banking system in Israel 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 service providers and allow them to compete with banks,” he said.
“One of the advantages of a central bank digital currency is that the payment provider does not hold your money, so you are not exposed to the credit of that company. This allows for a lower level of oversight and capital requirements than a traditional payment provider who holds your money, even for brief moments of time.”
The digital shekel will allow the public to pay with central bank money “everywhere and in any transaction we choose,” Abir said.
If the Israel Securities Authority decides to launch a digital shekel, it will likely need approval from the Finance and Justice Ministries.
“It will take some time before this technology enters all of our lives if we decide to implement it, but it has the potential to be the next revolution in payment systems,” said Abeer.