Israel is pushing forward with the development of its own central bank digital currency (CBDC), named the digital shekel, as confirmed by the Bank of Israel.

The bank has created a technological prototype that forms the core of the digital shekel system, allowing payment-service providers to access and offer advanced payment options such as micropayments, split payments, and multiparty signature payments.

Collaboration and the Digital Shekel Challenge

The Bank of Israel (BoI) is involving various service providers in co-developing an advanced digital payments ecosystem centered on the digital shekel. As part of this initiative, the BoI announced the “Digital Shekel Challenge,” an experiment inspired by the Bank for International Settlements (BIS) Innovation Centre’s “Project Rosalind.” This project examined how application programming interface (API) functionalities could support a retail CBDC and facilitate secure payments.

The challenge includes three phases: application and presentations, access to the new network for selected projects, and a final presentation to judges. Participants will compete to build real-time CBDC payment systems for the general public within a sandbox environment provided by the BoI, which will be equipped with a layer of APIs. The challenge will kick off with a webinar on June 6, followed by a process of applications and presentations, culminating at the end of September when the results will be discussed.

Although the BoI has not yet decided whether to issue a CBDC, it has been exploring the technology for years. In 2021, it conducted a pilot test and last year monitored scenarios such as the widespread use of stablecoins. The BoI also collaborated with Hong Kong and the BIS to investigate how to protect these systems from hacks. 

Significance for the Israeli Ecosystem 

The initiative, according to Shauli Rejwan, managing partner at Masterkey Venture Capital, is a significant step for the Israeli ecosystem. It potentially bridges the gap between the Web3 industry and government, despite the fact that decentralized finance, zero knowledge, and permissionless solutions are not yet being considered.

Rejwan detailed that the program consists of three phases: application and presentations, access to the network for selected projects, and a final presentation to judges, some of whom have spoken at recent crypto events.

Entities from the private, public, and academic sectors have been invited to participate in the experiment. Priority will be given to uses with original and innovative characteristics in the payments world, whether improvements to existing applications or entirely new ones. While CBDCs are designed for universal use cases, participants in Israel’s CBDC experiment can also build solutions for unique niches and scenarios.

On April 16, BoI deputy governor Andrew Abir expressed that competition between CBDCs and banks is beneficial for the nation’s economy. He believes that the development of a digital shekel would garner public support, emphasizing that the digital shekel will be developed transparently by the BoI, the same institution that stands behind Israel’s cash. According to Abir, the digital shekel could also benefit the BoI by incentivizing banks to offer higher interest rates due to the option of holding digital shekels. 

Privacy Concerns and Public Consultation

A public consultation report released on May 11 confirmed Abir’s belief in public support for CBDC development. The report indicated that all responses to the public consultation support continued research on various implications for the payments market, financial and monetary stability, and legal and technological issues. However, respondents unanimously raised concerns about potential privacy breaches associated with CBDCs.

Israel’s push towards developing a digital shekel is marked by significant steps such as the Digital Shekel Challenge, which aims to create an advanced digital payments ecosystem.

While the decision to issue a CBDC has not been finalized, the BoI’s ongoing exploration and public consultation indicate a strong interest and support for this technological advancement, with considerations for both its benefits and potential privacy issues. 

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