On March 11th, the Bank of Israel (BoI) revealed plans to introduce an interest-bearing central bank digital currency called the "digital shekel." In a new document, the central bank provided details on its proposed CBDC model.

Key Design Elements

The digital shekel will operate on a two-tier model involving commercial banks. This structure aims to facilitate round-the-clock payments, offline capabilities, fast transactions, and multi-payment functionality with balance limits. Despite ongoing internal debates, the BoI has targeted December 2024 to publish a finalized design document.

Among the envisioned features are the core CBDC attributes - instant, low-cost payments along with programmability and transparency. Additionally, the digital shekel will incorporate deposit accounts for individuals and a liquidity buffer mechanism for financial institutions.

Privacy a Priority

Addressing privacy concerns, the BoI assured that users' transaction data and personal information would be safeguarded. However, the central bank will stipulate what data is required for effective CBDC operations, monitoring, and oversight.

Incentivizing Adoption

Currently, Israeli banks pay 4.86% interest on customer shekel deposits. Under the CBDC plan, banks will be exempt from interest payments on digital shekels held in their short-term liquidity reserves - an incentive for adoption.

The BoI began evaluating a CBDC in 2021, though pilot testing has not begun. Last year, officials believed growing stablecoin usage could drive digital shekel embrace, but noted Israel lacked widespread stablecoin payments adoption at that time.

Distinct CBDC Model

The recent document reveals the central bank is undecided on some CBDC specifics. However, two key distinctions from other CBDC models are proposed:

1) Separating wallet provision and payment services from commercial banks. Users could create digital shekel wallets through their existing bank or payment provider using open banking APIs and link multiple accounts.

2) A centralized database holding pseudonymized account balances that the BoI can view for monitoring purposes, though not personal user data which would be encrypted and only viewable by the user's provider.

The BoI stressed maintaining control over the CBDC, with the ability to track institutional balances despite lacking access to individual holdings.

As Israel advances its CBDC plans, the central bank aims to strike a balance between innovation, privacy protections, and robust governance over the potential digital shekel.