How the Bank of Israel framed the case for a digital shekel in 2021: six possible motivations, the design model on the table and the risks it admits.
Two-tier model in the Bank of Israel draft
A report that starts with ‘why?’
Many CBDC papers begin with technology. The Bank of Israel’s 2021 report begins with a question: if the country’s payment system already works well, what would a digital shekel add? That framing makes it a useful model for anyone reading about CBDCs, because it shows how a cautious central bank reasons.
The background is a timeline. An internal team was appointed in November 2017 and reported a year later, recommending continued study rather than issuance. By 2021 the mood among central banks had shifted. COVID-19 sped up the move to digital payments, and many central banks, including those of large economies, were researching CBDCs more seriously. The Bank of Israel set up a steering committee led by a deputy governor to build an action plan, while stating plainly that it had not decided whether to issue anything.
What a CBDC is, and is not
The report spends time separating a CBDC from the crypto assets people already know. Cryptocurrencies generally belong to no state, and some have no central operator. A digital shekel would be issued by the central bank, which would decide how much exists, how it can be used and what rules apply. Many cryptocurrencies offer anonymity and wild price swings. A CBDC would be supervised, built to meet anti-money-laundering and counter-terrorism-financing rules, and worth exactly one cash shekel.
Stablecoins sit in between. They aim for a steady value, but private companies issue them and their stability depends on the assets behind them. The central bank’s point is that a CBDC would carry the same safety as cash, because the issuer is the central bank itself.
The six motivations
1. A modern alternative for payments. A convenient, secure, low-cost public option could keep the payments market competitive and reduce the risk that private currencies, or digital currencies issued by other countries, come to dominate local payments.
2. Infrastructure for programmable money. Money that only moves when set conditions are met could support delivery-versus-payment settlement, payments between connected devices and micropayments, with private firms building the applications.
3. Resilience. A separate infrastructure would let people keep paying if an existing system failed.
4. Cheaper cross-border payments. For a small, open economy, slow and costly foreign-currency payments are a real drag; a CBDC built to international standards might help.
5. Digital payments with some privacy. A CBDC can keep some cash-like protection against commercial use of payment data, so long as anti-money-laundering and tax-reporting rules are respected.
6. Support for reducing cash use. Israel passed a law in 2018 to curb cash in order to fight the shadow economy. A digital shekel available to everyone, including people without a bank account, smartphone or internet access, could make that policy easier to follow.
Crucially, the report adds that some of these benefits could be achieved by improving today’s payment systems, and that issuing a CBDC carries risks of its own. Weighing that trade-off is the committee’s main job.
The draft model
The committee sketched a model in general terms, to invite comment from industry and academics rather than to fix a design. Its main features: a two-tier structure in which the central bank supplies the core infrastructure and banks, card companies and technology firms provide wallets and services; undecided technology, since the model does not say whether it would use a distributed ledger or a central registry; full and immediate conversion to existing payment means and to foreign currency; payment by phone but also by simple devices, with at least limited offline use; and no cost, or near-zero cost, to pay.
On privacy the report is candid: absolute privacy would be impossible because of money-laundering and tax rules, but different levels of privacy toward payment providers and merchants could be offered. Economically, the digital shekel would pay zero interest, though the system could technically allow that to change, and authorities should be able to set limits on how much can be held and used. Anyone, including children and tourists, could use it without a local bank account.
The risk that bank deposits drain away
A theme running through CBDC debates, and treated at length in the report, is disintermediation. Commercial banks fund themselves partly with customer deposits. If people moved large sums into a safe central-bank digital wallet, banks could lose funding and lending could become costlier. The draft model’s zero interest rate and its option of limits on holdings are levers that bear directly on this risk, since they keep a digital shekel closer to a means of payment than to a savings product competing with bank deposits.
Why this matters outside Israel
The report is one of several that central banks published as they prepared for a possible digital-currency era, and it complements the South African Reserve Bank’s wholesale experiment described in our Project Khokha article. Khokha tested how banks settle with one another; the shekel work asks what the public might hold. Both treat distributed ledger technology as one possible tool, not a foregone conclusion.
Sources
- A Bank of Israel Digital Shekel: Main Points of the Draft Model. Bank of Israel, Steering Committee on the Potential Issuance of a Digital Shekel, 2021.
This article is our own summary and commentary. The reports remain the property of their authors and publishers; read the originals for full detail. Spotted an error? Tell us. See our editorial policy.