Bank of Israel Unveils Digital Shekel to Enhance Competition and Spur Financial Innovation

The Bank of Israel (BOI) plans to launch a digital shekel that will compete with commercial banks for deposits and digital payments. The central bank believes that the digital shekel, which is still under development, will force banks to improve their services and lower fees.

Bank of Israel Plans Digital Shekel to Enhance Financial System, Spur Competition

Jerusalem, Israel - The Bank of Israel (BOI) has announced plans to introduce a digital shekel (e-shekel), a central bank digital currency (CBDC), that will challenge traditional commercial banks for deposits and digital payments. This move aims to foster a more competitive financial landscape in Israel and enhance the efficiency and accessibility of financial services.

In his address at a recent event organized by the Israeli newspaper Globes, BOI Deputy Governor Andrew Abir outlined the potential impact of the digital shekel on the nation's financial system. He emphasized that the introduction of a CBDC would disrupt the role of commercial banks as the primary custodians of deposits and facilitators of digital payments.

Abir noted that Israel's financial system currently lacks the necessary competitiveness, leading to a lack of innovation and laxity among lenders. The digital shekel, he argued, would create a competitive environment by providing consumers with a safe and secure alternative to traditional banking services.

"The public's ability to hold part of their money in the digital shekel may cause banks to want to incentivize the public to keep their money with them – whether by paying interest on the current account and higher interest on deposits, or through other added values such as better service, better technology," Abir said.

The BOI also intends to compete with banks for digital payments through the e-shekel. Abir pointed out that banks have encroached on the central bank's role in retail payments as cash usage declines. The digital shekel, he explained, would allow consumers to make payments directly with BOI-backed currency, intensifying competition among different payment methods.

However, Abir stressed that the e-shekel differs significantly from decentralized cryptocurrencies, such as Bitcoin, which are not backed by a central authority. He reiterated that the digital shekel would be under the purview of the BOI, providing the same level of trust and stability as physical cash.

Sandbox for Digital Shekel Innovation

Recognizing the transformative potential of the digital shekel, the BOI intends to establish an API-based sandbox for banks and financial institutions. This sandbox, inspired by Project Rosalind, a collaborative effort by the Bank for International Settlements (BIS) and the Bank of England, will provide an environment for testing and developing innovative use cases for the e-shekel.

The sandbox is scheduled to launch within the next few weeks, enabling stakeholders to explore novel applications for the digital currency and identify opportunities for enhancing financial services.

Considerations and Cautions

Despite the enthusiasm surrounding the digital shekel, Abir emphasized that the BOI is proceeding with caution. The central bank has not yet made a final decision on issuing an e-shekel and is currently exploring its feasibility.

"The digital shekel is still in its early stages of development, and we are approaching it very carefully," Abir said. "We are aware of the potential risks and challenges associated with CBDCs, and we are committed to addressing them before any implementation."

The BOI is evaluating various considerations, including consumer protection, financial stability, and the impact on the banking sector. The central bank will also need to define the legal and regulatory framework for the digital shekel, ensuring its safe and responsible use.

Competition Beyond Banks

The digital shekel is not limited to competing with commercial banks. Stablecoins, cryptocurrencies that are pegged to the value of a fiat currency, pose a potential rival in the shekel-based digital payments market.

In March, Bits of Gold, a local cryptocurrency exchange, received regulatory approval to test BILS, a shekel-backed stablecoin. BILS aims to challenge traditional banks by offering faster, cheaper, and more efficient transactions.

As the digital shekel progresses through its development, it remains to be seen how it will interact with stablecoins and other digital payment providers. The introduction of the e-shekel is expected to trigger a wave of innovation and competition in Israel's financial landscape, potentially leading to greater efficiency, accessibility, and choice for consumers.