In a groundbreaking move, Israel’s central bank has announced its support for a new central bank Digital currency (CBDC) based on the Israeli shekel, which, notably, has the potential to bear interest. The Bank of Israel made this announcement on March 11, revealing an advanced design for the shekel CBDC which will operate on a two-tier model. This model promises instant, 24/7 payments, multipayment support, offline use, and limitations on balances. Furthermore, there is an intriguing option for this CBDC to become interest-bearing.

A pivotal aspect of this initiative is its approach to privacy. The central bank’s architecture for the Digital Shekel is designed to allow control and monitoring of the system while ensuring that personally identifiable information about users’ balances and transactions remains inaccessible to the bank. This focus on privacy could set a precedent for how digital currencies balance the need for regulatory oversight with the right to individual privacy.

Currently, commercial banks in Israel offer an interest rate of 4.86% on fiat shekel deposits and savings. With the introduction of the digital shekel, banks would have the opportunity to hold this CBDC as part of their short-term liquidity buffers. However, in contrast to traditional deposits, this portion of their reserves would not accrue interest. This differentiation underscores the digital shekel’s unique position within Israel’s broader financial ecosystem.

The Bank of Israel’s documents highlight the necessity for a data structure that can enforce holding restrictions and potentially apply interest based on various factors, such as the type of user and the size of the balance. This indicates a flexible, yet controlled approach to the digital currency, ensuring compliance with regulatory standards while possibly tailoring the currency’s utility and benefits to different user segments.

Israel’s journey towards a digital shekel started back in 2021, though until this recent announcement, no pilot tests had been initiated. The Bank of Israel’s cautious approach, underscored by their statement on the interdependence of the digital shekel system’s components, suggests a careful balance between innovation and stability. Previously, in April 2023, discussions about the possible issuance of a shekel CBDC were tied to the potential increase in stablecoin use within the country. However, the central bank noted that there had been no significant adoption of stablecoins as a means of payment in Israel at that time.

This development marks a significant milestone in the global move towards digital currencies, positioning Israel at the forefront of this technological evolution in finance. The digital shekel’s proposed features, particularly its interest-bearing potential and privacy considerations, could serve as a model for future CBDCs around the world.

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