The Bank of Israel is taking significant steps toward the development of its digital currency, known as the digital shekel, with the announcement of the "Digital Shekel Challenge." This initiative invites stakeholders from diverse sectors to participate in developing applications for a potential central bank digital currency (CBDC).

The challenge aims to explore the potential development and applications of the digital shekel by testing a technological prototype that simulates the core system of the digital currency and its API layer. Through this prototype, payment service providers and other stakeholders can access the system and develop services for the public, offering new payment options with the digital shekel.

Andrew Abir, Deputy Governor of the Bank of Israel, emphasized the importance of collaboration between the central bank, the private sector, and the government for the success of the digital shekel. He stated that the challenge allows financial industry participants from Israel and abroad, as well as various payment stakeholders, to engage practically in the thinking, planning, and design of the digital shekel.

Participants in the pilot program will be tasked with developing various use cases for the digital shekel, utilizing the API layer. Priority will be given to original and innovative payment applications that enhance existing systems or introduce entirely new solutions.

According to Shauli Rejwan, founder and managing partner of crypto investment fund Masterkey VC, potential focus areas for solutions include micropayments, digital trusts, and data products. Rejwan highlighted that the program will consist of three phases: application and presentations, access to the new network for selected projects, and a final presentation to judges, including speakers from recent crypto events.

Rejwan also noted that while decentralized finance (DeFi) and permissionless solutions are not currently under consideration, this initiative represents a significant step for the Israeli ecosystem in bridging the gap between the web3 industry and the government.

The Bank of Israel began exploratory research on the digital shekel in 2017, focusing on understanding global trends in digital currencies, technological feasibility, and potential impacts on monetary policy and financial stability. In 2021, the central bank accelerated its efforts, establishing a dedicated task force to further investigate and develop the digital shekel.