Israel plans to launch a central bank digital currency (CBDC) with interest-bearing characteristics

Key points:

•The Bank of Israel plans to launch an interest-bearing digital shekel CBDC.

•Digital currencies will ensure privacy by limiting central bank access to personal data.

•Commercial banks may include digital shekels in their liquidity buffers without paying interest.

The Bank of Israel has outlined a digital shekel that features 24/7 transactions, privacy protection, and unique interest-bearing capabilities.

The Bank of Israel recently revealed plans to support a new central bank digital currency (CBDC) with unique properties. This includes the interest-bearing potential that the digital shekel may have. The announcement, released on March 11, outlines a vision for a digital currency that blends cutting-edge financial technology and privacy considerations. The proposed CBDC aims to increase the efficiency of domestic payment systems.

The digital shekel will operate on a two-tier model. It promises 24/7 instant transactions, support for multiple payment methods, and offline capabilities. Additionally, CBDC will have built-in limits on balances. One of its most notable features is the option to accrue interest. This makes the digital shekel an asset that may be of interest to consumers and investors alike.

Privacy and Rate Updates

In its announcement, the Bank of Israel highlighted privacy concerns. The digital shekel is structured to limit central bank access to personal data. Specifically, central banks will not be able to access end users’ balance and transaction information. This approach aims to strike a balance between operational transparency and user privacy.

The interest-bearing potential of the digital shekel introduces a new aspect to the CBDC space. While Israel’s commercial banks currently offer 4.86% interest rates on fiat shekel deposits, the digital shekel would allow banks to include them in short-term liquidity without paying interest. The central bank outlined that the CBDC’s data structure will support holding limits and interest applications tailored to user type and balance size.

Bank of Israel cautious about CBDC issuance

Since 2021, Israel has been exploring the idea of issuing a digital shekel. However, as per the latest update, no pilot testing has been conducted yet. The Bank of Israel said that due to the interconnectedness of the components of the digital shekel system, decisions on its implementation remain provisional.

The bank also noted that the shift to the digital shekel could be accelerated if the use of stablecoins increases within Israel. Despite this potential catalyst, the central bank noted that stablecoin adoption has yet to reach significant levels in the country’s payments sector. This careful, measured approach reflects the complexity of introducing a CBDC and the need for thorough planning and testing.