Israel's Central Bank Considers Digital Shekel Issuance

JAKARTA - Israel's central bank continues to push forward with its plan to issue a digital shekel, citing the need to improve the country's payment system. However, on Tuesday 12 September it still had not been determined whether it would launch the digital shekel.

The Bank of Israel in November 2021 stepped up research and preparations for the possibility of issuing a digital shekel to create a more efficient payment system after first considering issuing a central bank digital currency (CBDC) in late 2017.

“Whether we will issue a digital shekel or not is still an open question, as it is in most other developed countries, if not all,” Bank of Israel Governor Amir Yaron said at a conference on digital currencies.

"In this regard, we remain committed to being at the forefront, and beyond that, to supporting boundary-pushing efforts, in our CBDC exploration, as well as in our efforts to modernize and advance our payment systems... and the financial system in general, " said Yaron, quoted by Reuters.

Israel's central bank has been experimenting with the digital shekel with partners in Hong Kong and the Bank for International Settlements. He said the project, called Sela, has proven the viability of a retail CBDC and "combines accessibility, competitiveness, and preventative cybersecurity, while retaining the key advantages of physical cash."

Yaron said that given the rapid digitalization of the economy, working on a CBDC makes sense and noted that Israel has closed the gap with other countries, while emphasizing that if Israel chooses it, "it will provide at least as much as a digital payment method."

Deputy Governor Andrew Abir said that for Israel, issuing digital shekels would provide more competition in a financial system dominated by a few large banks and institutions.

"CBDCs can offer a level playing field where new players can offer financial products," Abir said.

Abir said the sharp jump in interest rates in the past year shows the need for this, as commercial banks do not fully pass on the interest rate increases to their customers' balances, while on their loans, the transmission is full and immediate.

"And there has been an understandable negative reaction from the public," Abir said, adding that digital currencies could provide benefits to consumers.

"I believe central banks should again consider the possibility of (issuing) interest-bearing CBDCs - that is, central banks paying interest on CBDCs directly to end users who hold them, and enjoy the security provided by the central bank. This is a complex topic with many implications, and we need to considering it as the project progresses," Abir said.