Digital shekel will compete with banks for deposits, payments: Bank of Israel

A digital shekel will compete with commercial banks for deposits and digital payments, forcing them to improve their services and lower their fees, says the Bank of Israel (BOI).

In his speech at an event organized by the local newspaper Globes, BOI Deputy Governor Andrew Abir discussed the digital shekel and its projected impact on the Israeli financial system.

The disintermediation of commercial lenders has been cited as a critical challenge in launching a CBDC globally. In some countries like Germany and Italy, the lenders have pledged to oppose potential central bank digital currency (CBDC) efforts unless their role in the financial system is guaranteed protection.

However, according to Abir, CBDCs should compete for deposits with banks.

The deputy governor opined that despite BOI’s best efforts, Israel’s financial system is not as competitive as it should be. Consumers keep depositing their money with banks because of a lack of safe and secure options, which has promoted laxity with lenders.

This will all change with the launch of an Israeli CBDC, Abir told the attendees.

“The public’s ability to hold part of their money in the digital shekel may cause banks to want to incentivize the public to keep their money with them – whether by paying interest on the current account and higher interest on deposits, or through other added values such as better service, better technology,” he said.

BOI intends to keep the banks on their toes even further through interest rate payments on digital shekel holdings. As CoinGeek reported, BOI published a report last month that claimed paying interest on a CBDC would force the banks to raise their rates and, ultimately, raise bank deposits and increase lending and profitability.

Besides deposits, the digital shekel will allow the central bank to compete with banks in digital payments. According to Abir, banks have eroded BOI’s role in the retail payments economy as cash usage has dwindled.

“The digital shekel will allow us to pay with Bank of Israel money everywhere, and in any transaction we choose. This will enable the Bank of Israel to intensify the competition between different means of payment,” he said.

Bank of Israel to launch digital shekel sandbox

With all the anticipated disruptions, Abir noted that it’s important to carefully consider the design and implementation of the digital shekel to protect consumers and maintain financial stability in the $525 billion economy.

To this end, the BOI is launching an API-based sandbox for banks and financial companies to test innovative use cases for the CBDC. Launching in a few weeks, the sandbox is inspired by Project Rosalind, the BIS and Bank of England’s sandbox testing two-tier CBDC use cases.

Despite all the CBDC’s promises, the BOI has not yet decided on issuing a digital shekel and is only exploring its feasibility, Abir concluded.

BOI, however, continues to shun digital currencies. Abir reiterated that the digital shekel is not similar to digital currencies and was not developed “by some anonymous Satoshi Nakamoto.”

“Everyone will know who is behind the digital shekel and who is responsible for it—it will be the central bank, the same Bank of Israel that stands behind the cash we all know and trust,” he remarked.

The digital shekel will not only be competing with commercial banks, however. Israeli companies have been targeting shekel-pegged stablecoins, which could prove to be formidable rivals.

In March, local exchange Bits of Gold received regulatory approval to test BILS, a shekel-backed stablecoin. The company intends to challenge commercial banks, touting BILS as a faster, more efficient, and cheaper way to send and receive shekels.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: Finding ways to use CBDC outside of digital currencies

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