The Bank of Israel (BOI) is envisioning a future where the digital shekel competes directly with commercial banks for deposits and digital payments. BOI Deputy Governor Andrew Abir recently discussed the potential impact of the digital shekel on the Israeli financial system at an event organized by the local newspaper, Globes.

Challenging the Status Quo

Abir emphasized that the current financial system in Israel lacks competitiveness. Consumers predominantly deposit their money with banks due to a perceived lack of safe and secure alternatives. The introduction of a digital shekel aims to change this dynamic by offering an alternative that could prompt banks to improve their services.

Abir suggested that banks might offer incentives such as interest on current accounts and higher interest rates on deposits to encourage customers to keep their money with them. Additionally, banks could enhance their services and technology to compete effectively with the digital shekel.

Digital Payments Revolution

Beyond deposits, the digital shekel will also enable the BOI to compete with banks in the realm of digital payments. Abir pointed out that banks have diminished BOI's role in the retail payments economy as cash usage has declined. The digital shekel aims to reverse this trend by allowing transactions to be conducted using Bank of Israel money.

Sandbox Testing and Consumer Protection Sandbox Initiative

To ensure a smooth rollout and protect consumers, BOI is launching an API-based sandbox for banks and financial companies. This sandbox will allow them to test innovative use cases for the CBDC, similar to Project Rosalind by the BIS and Bank.

Abir stressed the importance of carefully designing and implementing the digital shekel to maintain financial stability in Israel's $525 billion economy. While the BOI is exploring the feasibility of issuing a digital shekel, no final decision has been made.

Clear Distinction from Digital CurrenciesCentral Bank Control

Abir clarified that the digital shekel is distinct from digital currencies like Bitcoin, emphasizing that it will be issued and controlled by the central bank. He assured that the BOI would be transparent about its involvement with the digital shekel, contrasting it with the anonymity associated with digital currencies.

While the digital shekel aims to compete with commercial banks, it also faces competition from Israeli companies launching shekel-pegged stablecoins. For instance, local exchange Bits of Gold has received regulatory approval to test BILS, a shekel-backed stablecoin, which promises faster and cheaper transactions compared to traditional banking methods.

In summary, As the BOI continues to explore the feasibility of this initiative, the financial industry and consumers alike will be closely watching how it unfolds and impacts the broader economy.