Israel’s Central Bank Unveils Plans for Interest-Bearing CBDC
Israel’s Central Bank, the Bank of Israel (BoI), has announced its plans to launch a Central Bank Digital Currency (CBDC) called the “digital shekel.” The CBDC will be an interest-bearing currency that aims to provide round-the-clock payments, offline usability, quick transactions, and multipayment support. The BoI has set a deadline of December 2024 for publishing a design document for the digital shekel.
Features of the Digital Shekel
The proposed digital shekel will have several key features:
- Two-tier model: This model will allow for efficient payments, offline use, quick transactions, and multipayment support with balance caps.
- Privacy concerns addressed: The BoI assures users that their transaction balances and personal information will not be compromised. The required data for effective operation, monitoring, and control will be specified by the Central Bank.
- Encouraging adoption: Commercial banks will be exempt from interest if they add the CBDC to their short-term liquidity reserves, aiming to incentivize the adoption of the digital shekel.
Background on the Digital Shekel
The Bank of Israel has been considering the launch of a digital shekel since 2021. However, pilot tests have not yet begun. Last year, the BoI believed that an increase in stablecoin usage would pave the way for a digital shekel. However, stablecoin adoption as a major payment method in Israel was not significant enough at the time.
Main Distinctions of the Digital Shekel
The proposed digital shekel has two main distinctions from existing CBDCs:
- Separation of responsibilities: The digital shekel aims to divide banks’ responsibilities from the supply of wallets and payment services. Users can generate a CBDC wallet using their existing bank or payment provider, which will be responsible for transmitting payment instructions and depleting the CBDC wallet.
- Central database with pseudonymous account balances: The digital shekel will have a central database that contains information on account balances under pseudonyms. The Bank of Israel will maintain control and have access to company balances but not personal user information. Encrypted personal data will only be accessible to the users’ linked payment service providers.
Hot Take: Israel’s Move Towards a CBDC
Israel’s Central Bank’s announcement of plans to launch an interest-bearing CBDC, the digital shekel, is a significant development in the country’s monetary landscape. Here are some key takeaways:
- The digital shekel aims to provide efficient and convenient payment options for users, including round-the-clock payments, quick transactions, and offline usability.
- Privacy concerns have been addressed, ensuring that users’ transaction balances and personal information remain secure.
- The proposed system encourages adoption by exempting commercial banks from interest if they add the digital shekel to their short-term liquidity reserves.
- The digital shekel has distinct features, such as separating banks’ responsibilities from wallet provision and payment services and maintaining a central database with pseudonymous account balances.
In conclusion, Israel’s plans for an interest-bearing CBDC demonstrate its commitment to embracing digital currencies and enhancing its financial infrastructure. The launch of the digital shekel will offer new possibilities for efficient and secure transactions in the country.
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