Bank of Israel considering the issue of digital shekel stablecoin

The Bank of Israel is preparing an action plan for the potential issuance of a digital shekel. In a recent document, the bank discussed the conditions that would enable or support a decision to issue a BOI Central Bank Digital Currency (CBDC) at some point, indicating a number of variables that may have an effect on the steering committee’s recommendation.

A CBDC is a digital currency issued and backed by a central bank, representing a digital version of a country’s fiat currency (money backed by a government). CBDCs are designed to be used as a medium of exchange and store of value, just like traditional currency, employing stablecoins, whose value is pegged to a reference asset, such as fiat currency.

Some may think this sounds like the popular cryptocurrency Bitcoin. However, unlike decentralized cryptocurrencies like Bitcoin, CBDCs are centralized and controlled by a central authority, such as a central bank or monetary authority.

Digital Currencies: They’re all the rage

The bank noted that an important factor in the issuance decision in Israel is the popularity of CBDCs issued by other countries, such as the US or the European Union.

The Bank of Israel building is seen in Jerusalem June 16, 2020. (credit: REUTERS/RONEN ZEVULUN)

The bank expects that the probability of such a development within the next few years is significant, and according to analyst and veteran trader Ilan Tennenbaum, that expectation is apt.

“The situation right now in the world is that some countries — for example, Australia, Brazil, Canada, China, India, Japan — already have a CBDC project on some level.”

Ilan Tennenbaum

“The situation right now in the world is that some countries – for example, Australia, Brazil, Canada, China, India, and Japan – already have a CBDC project on some level,” Tennenbaum said. “This discussion is going on all over the world and obviously, the US is in charge, so we’ll get a final decision from them regarding a CBDC, and then the Bank of Israel will do the same [as they].”

Additionally, the decline in the legitimate use of cash and its acceptance in transactions in Israel were identified as potential factors for the bank to consider. Although cash is still used in Israel in a significant portion of consumer transactions, it is highly probable that the use of cash as a means of payment will decline in the future.

Tennenbaum highlighted this as a potential opening for trouble, as it would grant the Bank of Israel total control over all of the digital cash flow within the system.

The bank warned that a significant penetration of stablecoins might impair the payment system due to competition in the domestic payment system. This would justify the issuance of a central bank’s digital currency in order to support competition in the payments and financial systems in the digital era. Technological developments may also provide justification for the issuance of a digital shekel, as it would be able to serve as an efficient and secure platform for advanced technological cases.

The Bank of Israel emphasized the importance of being prepared to advance the issuance of a digital shekel if the variables listed above support it. The steering committee would monitor developments on a periodic basis.

While no decision has yet been made, the Bank of Israel is taking proactive steps to be ready for the issuance of a digital shekel when the time is right. While the benefits of increased efficiency, financial inclusion, and enhanced security are significant, the operational complexity, risks to financial stability, privacy, and cybersecurity – as well as promoting user adoption – pose significant challenges. The Bank of Israel will need to carefully weigh these factors before closing cash register drawers in exchange for an Israeli CBDC.