Israel’s Digital Shekel: Will ‘SHAKED’ Shake Up the Future of Money?

The world of finance is rapidly evolving, and central banks globally are keenly watching the rise of digital currencies. Could Israel be the next nation to jump into the CBDC (Central Bank Digital Currency) arena? While no official decision has been made, the Bank of Israel is actively exploring the possibility of launching a digital shekel, tentatively named “SHAKED.” Let’s dive into what’s driving this exploration and what it could mean for the future of money in Israel and beyond.

What’s ‘SHAKED’ and Why is Israel Considering a CBDC?

Imagine a digital form of the Israeli Shekel, issued and backed by the Bank of Israel itself. That’s essentially what a CBDC like “SHAKED” would be. According to the Bank of Israel’s Steering Committee on the Potential Issuance of a Digital Shekel, they are developing an action plan to prepare for a potential CBDC launch. But what’s prompting this move? The committee has outlined several key scenarios that are pushing them to consider a digital shekel:

• The Rise of Stablecoins: Have you noticed the growing buzz around stablecoins? These cryptocurrencies, designed to maintain a stable value (often pegged to traditional currencies like the US dollar), are gaining traction. The Bank of Israel is watching this space closely. They believe that increased use of stablecoins, especially those not linked to the Shekel, could potentially disrupt Israel’s payment system and even negatively impact monetary transmission – the process by which central banks influence the economy through interest rates and money supply.
• Declining Cash Usage: While cash is still a significant part of daily transactions in Israel, payment habits are shifting. Globally, we’re seeing a move towards digital payments. The Bank of Israel wants to ensure that central bank-issued currency remains relevant in this evolving landscape. If cash usage declines significantly, and private companies dominate digital payments, the central bank’s influence could weaken.
• Boosting Competition in Payments: The Bank of Israel is keen on fostering a competitive and innovative financial system in the digital age. They see a CBDC as a potential tool to support competition within the payments ecosystem and the broader financial system. By providing a central bank-backed digital alternative, they aim to prevent a scenario where a few large private players control the digital payment space.
• Global CBDC Trends: What happens in major economies like the United States and the European Union matters. If these regions decide to launch their own CBDCs, it will undoubtedly influence Israel’s decision. The interconnected nature of the global financial system means that Israel needs to consider the international landscape when making decisions about its own digital currency.

Stablecoins: A Catalyst for CBDC?

The Bank of Israel’s report specifically highlights stablecoins as a potential driver for a CBDC. Why the concern? Let’s break it down:

• Payment System Stability: Imagine a scenario where a popular stablecoin becomes widely used for everyday transactions in Israel. If this stablecoin is not properly regulated or backed, it could pose risks to the stability of the payment system. Think about potential runs on the stablecoin or failures of the entities issuing them.
• Monetary Transmission Concerns: If stablecoins not pegged to the Shekel gain significant traction, it could complicate the Bank of Israel’s ability to manage monetary policy. The central bank’s tools are designed to work within the framework of the national currency. Widespread use of foreign-currency-linked stablecoins could weaken the effectiveness of these tools.
• Currently Low Adoption, But…: It’s important to note that the Bank of Israel acknowledges that stablecoin adoption as a means of payment is not widespread in Israel *right now*. However, they also recognize that things can change rapidly. A large private company, for example, could launch a successful stablecoin initiative, quickly altering public payment behavior.

Essentially, the Bank of Israel is taking a proactive approach. They’re not reacting to a crisis; they’re anticipating potential shifts in the financial landscape and preparing for a future where stablecoins could play a more prominent role.

Cash is Still King in Israel – But For How Long?

Despite the global move towards digital payments, cash remains relevant in Israel. Many consumer transactions still involve physical currency. However, the trend is clear: digital payments are on the rise. The Bank of Israel is considering the long game. They want to ensure that they continue to provide a form of central bank money that is relevant and accessible in a digital world. A CBDC could be that answer, ensuring that the public has continued access to risk-free central bank money even as digital payments become more dominant.

CBDC to Spark Competition and Innovation?

Competition is the lifeblood of a healthy financial system. The Bank of Israel believes that a CBDC could be a catalyst for greater competition in the payments space. Here’s how:

• Level Playing Field: A CBDC could provide a public digital payment option, potentially leveling the playing field for smaller payment providers and FinTech companies. It could reduce reliance on established payment rails controlled by a few large players.
• Innovation Driver: The infrastructure built for a CBDC could spur innovation in financial services. It could provide a platform for new payment solutions and financial products.
• Reduced Costs: In the long run, a well-designed CBDC could potentially lead to lower transaction costs compared to some existing digital payment methods.

The Global CBDC Race and Israel’s Position

Israel isn’t operating in isolation. Central banks around the world are exploring CBDCs, with some, like China, already piloting digital currencies. The actions of major players like the United States and the European Union will significantly influence Israel’s decision-making process. If these major economies launch CBDCs, it could create pressure for Israel to follow suit to maintain its competitiveness and integration into the global financial system. Cross-border payments and interoperability will become increasingly important in a world with multiple CBDCs.

Israel’s Crypto Regulation Landscape: A Quick Glance

It’s worth noting that Israel’s approach to cryptocurrency regulation is still developing. The Israel Securities Authority (ISA) has proposed classifying crypto assets as securities, a move that has raised concerns within the crypto industry in Israel. This proposed legislation suggests a relatively cautious approach to crypto regulation compared to some other jurisdictions. The development of a CBDC, however, signals a clear interest from the Bank of Israel in engaging with the digital currency space and shaping its future.

Conclusion: “SHAKED” – A Glimpse into Israel’s Digital Future?

While “SHAKED” is still in the planning phase, the Bank of Israel’s active exploration of a CBDC is a significant development. Driven by the rise of stablecoins, evolving payment habits, and a desire to foster competition, Israel is seriously considering joining the global CBDC movement. The coming years will be crucial as the Bank of Israel continues to monitor the situation, develop its action plan, and ultimately decide whether to unleash the digital shekel upon the world. One thing is clear: the future of money in Israel, like in many other nations, is increasingly digital, and central banks are adapting to this new reality.