BoI team recommends against issuing digital shekel

Karnit Flug Photo: Reuters

The team, set up by outgoing Governor of the Bank of Israel Karnit Flug, finds that a central bank digital currency is not currently relevant for Israel.

Will the Bank of Israel issue a digital shekel in the near future? Apparently not, if it accepts the recommendations of a team the bank set up to inquire into the idea. The recommendations were published today.

The team was set up by outgoing Governor of the Bank of Israel Karnit Flug in November 2017 to study the subject of central bank digital currency (CBDC). Flug will step down form her post next week, and will be replaced by Amir Yaron. The bank says that "publication of the report is intended to bring the work carried out by the bank to the attention of the public and to facilitate public discussion."

"Central banks around the world are examining the possibility of issuing digital currency and/or using distributed technologies in the payment systems, but no advanced economy has yet issued digital currency for broad use. A few central banks in developed countries are in advanced stages of examining the feasibility of issuing digital currency. In contrast, there are others that have announced that they are not planning to issue digital currency in the near future, because the payment systems in their countries are efficient and provide good alternatives," the report summary states.

The report continues: "The team’s work shows that there is currently no uniform specification for central bank digital currencies. Its accessibility (to the entire public or only to financial institutions), the method of issuance (balanced-based or token-based), the extent of anonymity in its use, and whether it will bear interest, can all be determined." The document presents the advantages, disadvantages and risks inherent in the various options.

The report also sets out the main purposes that issuing a CBDC might serve. "One of those objectives is maintaining the public’s access to the central bank’s liability, in the event that the use of cash declines significantly as is happening in Sweden. However, this issue is not relevant to Israel at this time.

"Another motivation for issuing an e-shekel may be to support the payments system (including improved redundancy) and make payments more efficient. Under certain specifications, and particularly if it bears interest, the e-shekel can be an additional monetary tool, but that is not a main objective of issuing it."

The team adds in its summary: "Other benefits that may derive from issuing an e-shekel are that it may help to combat the unreported economy, it can be adapted to an advanced technological environment, it can help advance the fintech sector in Israel, and more. Adaptation to potential advances in this field in other countries is also an important consideration."

"There are expected to be quite a few material and technological difficulties and risks in the issuance of CBDC, which mainly concern the potential impact on the financial system," the team warns. " In addition, it is expected that the issuance of CBDC will have an impact on the central bank as it issues and manages cash and conducts monetary policy, and on the payments system."

The Bank of Israel says that the team will continued to study the matter, and will follow developments around the world, and particularly at other central banks, as well as relevant technological developments both in Israel and abroad."

Published by Globes, Israel business news - en.globes.co.il - on November 6, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Karnit Flug Photo: Reuters
Karnit Flug Photo: Reuters
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