Bank of Israel Outlines Potential for a Digital Shekel

Key Takeaways

• The Bank of Israel is exploring the potential scenarios for the introduction of a digital shekel
• A digital shekel could increase efficiency, reduce costs, and promote greater financial inclusion
• Concerns about government surveillance and the impact on financial stability
• The Bank of Israel is taking a methodical approach to exploring the integration of blockchain technology, digital assets, and a CBDC
• The success of a digital shekel will depend on their ability to meet the unique needs of their economy and financial system

What Is a Digital Shekel?

A digital shekel is a proposed digital currency that would be issued by the central bank of Israel, the Bank of Israel (BOI). Like other central bank digital currencies (CBDCs), the digital shekel would be a form of electronic money that is backed by the central bank and issued on a blockchain or other digital ledger.

The Bank of Israel (BOI) has recently released a statement detailing the potential scenarios that could lead to the introduction of a digital shekel. With many countries around the world moving towards the implementation of Central Bank Digital Currencies (CBDCs), the potential development of a digital shekel could revolutionise the financial system, increase efficiency, reduce costs, and promote greater financial inclusion.

Advantages of a Digital Shekel

The BOI is taking a methodical and deliberate approach towards exploring the integration of blockchain technology, digital assets, and a CBDC. While the potential risks and challenges associated with the creation of a digital shekel must be carefully considered, the benefits of a digital shekel could be too significant to ignore.

One significant advantage of a digital shekel is the increased efficiency and speed of transactions. Digital transactions can be processed almost instantaneously, compared to traditional transactions that may take several days to clear. This could make transactions faster and more convenient for consumers and businesses, leading to increased economic activity. Another potential benefit of a digital shekel is enhanced security and transparency.

Digital currencies use advanced cryptography to protect against fraud and hacking. Additionally, all transactions are recorded on a public ledger, making them transparent and easily auditable. This could help reduce corruption and improve accountability within the financial system. Lastly, a digital shekel could potentially reduce costs and increase financial inclusion. Traditional financial services, such as banking and payment processing, can be expensive and inaccessible for many people, particularly those in developing countries. Digital currencies, on the other hand, can be accessed by anyone with an internet connection, regardless of their location or financial status.

The Challenges of a Digital Shekel

However, there are also potential challenges and concerns with the Bank of Israel's digital shekel initiative. One of the main concerns is security and privacy risks. While digital currencies are generally secure, they are still vulnerable to hacking and other cyber threats. Additionally, the public ledger used by digital currencies could potentially reveal sensitive information about users, such as their transaction history and spending habits.

Another concern is the potential impact on monetary policy. Central banks use monetary policy, such as adjusting interest rates and the money supply, to manage the economy and stabilise prices. With a digital currency, however, the central bank may lose some of its ability to control the money supply, as transactions would be processed independently of the central bank. While digital currencies have gained popularity in recent years, they are still not widely used by the general public. Additionally, many people may be skeptical of a digital currency issued by the central bank, as they may prefer to use decentralised currencies such as Bitcoin.

Other Countries Exploring Digital Currencies

Many other countries, including China, Sweden, and the United Kingdom, are also exploring the development of digital currencies. For instance, China has launched a digital version of its national currency, the yuan, known as the digital yuan. The digital yuan is being tested in several Chinese cities, and the central bank intends to roll it out nationwide. The BRICS alliance, consisting of Brazil, Russia, India, China, and South Africa, has been exploring the issuance of a joint reserve currency as an alternative to the US dollar and other major Western currencies.

The Swedish central bank, Riksbank, has been conducting trials of a digital version of the Swedish krona, called the e-krona. The e-krona would be similar to the digital shekel and digital yuan in that it would be issued and controlled by the central bank but would have some unique features tailored to the needs of the Swedish economy. 

In addition, Bank of England plans to issue a digital pound that will coexist with cash, offering benefits such as efficiency and accessibility. However, there are concerns about privacy and government overreach.

Zimbabwe to Introduce Gold-Backed Digital Currency

According to a report from the Sunday Mail, the Reserve Bank of Zimbabwe (RBZ) is planning to introduce a gold-backed digital currency as legal tender in order to stabilise the local currency, the Zim dollar. The electronic tokens will be supported by the nation's gold reserves, which will be held by the central bank. The RBZ's objective is to allow individuals holding Zim dollars to exchange their currency for the gold-backed token, thereby mitigating the impact of the local currency's volatility.

Investing.com indicates that one year ago, 1 U.S. dollar was equivalent to about 150 Zim dollars; currently, it is closer to 1,000 Zim dollars. Zimbabwe utilises both the Zim dollar and the U.S. dollar for transactions. In August of last year, the RBZ declared its intention to develop a central bank digital currency. Nigeria introduced its eNaira in October 2021, and other African nations have also been investigating CBDCs.

Canada to Advance Its Talks on CBDC

The Bank of Canada (BOC) has set its sights on introducing a central bank digital currency (CBDC) and is reaching out to the public for input on the currency's necessary features. The BOC plans to prepare for the digital Canadian dollar's creation by gaining the public's support before presenting it for a vote in Parliament. The consultation period, running until June 19, 2023,  is seeking suggestions on potential usage, security measures, privacy concerns, and features the digital Canadian dollar should possess.

The BOC hopes to create a digital currency that caters to Canadians' needs as they adjust to the world's increasingly digital nature. While the physical cash remains an integral part of Canadian currency, the BOC understands the threat that a foreign private cryptocurrency or CBDC could pose to the Canadian financial system's stability and official currency, the Canadian dollar. To guarantee Canadians always have an official and secure digital payment option issued by Canada's central bank, the BOC is exploring the possibility of creating a digital Canadian dollar.

A New Global Financial System

Comparing the BOI's digital shekel initiative to other digital currencies worldwide, it is clear that there is no one-size-fits-all approach to digital currencies. Each country's economy and financial system are unique, and, therefore, each digital currency must be tailored to meet the specific needs of that economy.

The development of digital currencies by central banks has the potential to transform the global financial system. Currently, the global financial system is dominated by a handful of large banks and financial institutions, which have significant control over the flow of money and credit.

In March 2023, Silicon Valley Bank (SVB), which was formerly the favored bank for tech companies and start-ups, suffered a collapse as a result of the panic of depositors and investors caused by a significant decline in share prices. The Federal Deposit Insurance Corporation (FDIC) stepped in and sold SVB to First Citizen Bank, a prestigious bank controlled by a family.

Will Digital Currencies Co-exist with Fiat Currency?

In conclusion, the Bank of Israel's digital shekel initiative has the potential to transform the way transactions are conducted within Israel. With many countries around the world exploring the development of digital currencies, it is likely that Israel will move towards the creation of a digital shekel in the coming years. Ultimately, the success of digital currencies will depend on their ability to meet the unique needs of each economy and financial system, while also ensuring security, transparency, and accessibility for all.