Israel on Its Way to Design Digital Shekel Based on Ethereum (Report)

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The Bank of Israel report­ed­ly launched a dig­i­tal cur­ren­cy pilot pro­gram, aim­ing to cre­ate its cen­tral bank dig­i­tal cur­ren­cy based on the Ethereum blockchain. How­ev­er, the project might face some sig­nif­i­cant challenges.

Israel Aiming at CBDC

Many lead­ing nations includ­ing Chi­na, Japan, France, Swe­den, and more have worked for years on devel­op­ing a dig­i­tal­ized ver­sion of their nation­al currency.

Accord­ing to a report by Globes, the cen­tral bank of Israel has joined the trend and is at the ini­tial stages of issu­ing a CBDC. The insti­tu­tion chose the Ethereum net­work to achieve the move. Yoav Sof­fer – CBDC Project Man­ag­er at the Bank of Israel – explained why:

“We did a tri­al with Ethereum tech­nol­o­gy, not because we think that that’s nec­es­sar­i­ly the tech­nol­o­gy we’ll use, but because it was a tech­nol­o­gy that was avail­able for us to get our hands dirty with, in order to under­stand its advan­tages and disadvantages.”

The Bank of Israel cre­at­ed teams that set up a tri­al envi­ron­ment based on the Ethereum blockchain and issued a token rep­re­sent­ing CBD­Cs. Sub­se­quent­ly, it designed dig­i­tal wal­lets, from which team mem­bers could exchange “imag­i­nary dig­i­tal shekels” with each oth­er with­in the bank.

It is worth not­ing that Aus­tralia, Hong Kong, and Thai­land used the same method­ol­o­gy in their CBDC projects and Israel also exam­ined the legal, eco­nom­ic, and tech­no­log­i­cal aspects.

Sof­fer described the ini­tia­tive as “chal­leng­ing.” He also point­ed out that due to its com­plex­i­ty, it is dif­fi­cult to give a fin­ish­ing day for the test­ing project:

“In gen­er­al, projects at the Bank of Israel have start and fin­ish dates. You know when they will end and what you need to achieve along the way. We don’t know when this project will end, with all that that implies.”

Yoav Soffer
Yoav Sof­fer, Source: Twiiter

The Challenges

Dur­ing the COVID-19 pan­dem­ic, dig­i­tal pay­ment meth­ods have been on the rise in Israel. As such, issu­ing a CBDC sounds like an idea that can fit into society’s new habits. Nonethe­less, there are sev­er­al chal­lenges in front of it.

The Bank of Israel is not sure if it can design such a dig­i­tal ver­sion of the shekel that can serve all the needs of the local pop­u­la­tion. In addi­tion, the infra­struc­ture for such a prod­uct seems not quite ready to uphold for the long term.

For exam­ple, Israel’s top finan­cial insti­tu­tion must have a solu­tion in case of emer­gency or a break­down of the net­work so peo­ple can set­tle trans­ac­tions even offline.

The cen­tral bank must also come up with a CBDC that is both acces­si­ble and com­pet­i­tive com­pared to oth­er types of pay­ment. Oth­er­wise, Israelis could sim­ply set­tle dai­ly trans­ac­tions with oth­er tra­di­tion­al methods.

Prob­a­bly the most sig­nif­i­cant chal­lenge of them all is how to make peo­ple who use cash switch to dig­i­tal pay­ments. For bet­ter or worse, the for­mer method is anony­mous while employ­ing a dig­i­tal shekel would be close­ly mon­i­tored by the gov­ern­ment, which is pre­cise­ly what threat­ens per­son­al privacy.

Fea­tured Image Cour­tesy of GulfNews

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