The Bank of Israel will not be issuing digital currency backed by the central bank anytime soon. This was revealed by the bank after receiving the report of a committee that was set up last year to explore the possibility of introduction of a digital token that is backed by the Israeli shekel.
The research inaugurated in Q4 of 2017 concluded that the proposed “digital shekel” is not feasible and therefore will not be implemented. The recommendation of the study is that the BoI not should not back a national digital currency in the near future.
The study seems to take a cue from the fact that “no advanced economy has adopted a national digital currency” even though a number of them have considered it.
It stated that the only country that has adopted a national digital currency is Venezuela. The report stated that the Venezuelan national crypto has not performed remarkably, but rather has been bogged with controversies in recent months.
A joint team from the Israeli ministry of finance and the Bank of Israel was set up by the then out-going Bank of Israel governor Dr Karnit Flug. The hope was that the introduction of a shekel-backed digital currency would enable near-instant transactions as well as reduce unreported economic activities while boosting taxes.
Although the report did not foreclose the possibility of having a central bank backed cryptocurrency for the nation in future, an excerpt of the study reads:
“The team does not recommend that the Bank of Israel issue digital currency in the near future. It is necessary to continue examining the field and to follow developments around the world before there are proper grounds for a decision to recommend issuing digital currency.”
The report stated that it is obvious that the distributed ledger technology would find use in enabling public access to bank’s liability. Another advantage of substantially reducing the circulation and use of cash as seen in Sweden was also highlighted. The report however stated that this is not a unique challenge that would warrant the adoption of a central bank backed digital currency.
The report still not foreclosing the possible adoption in future stated that having an alternative means of payment may not be a bad idea even though this would not be the core objective of issuing a central bank-backed digital currency.
It further expressed fears that the introduction of a central bank backed digital currency (CBDC) may pose risks to the Israeli financial and monetary system in an unforeseen way.
The report acknowledged that these risks are not yet understood and that more studies will be carried out, especially as more countries move to adopt national digital currencies.
The uncertainties and resultant decision to shelf the digital shekel seems to have stemmed from the gray areas associated with digital currencies as a new monetary tool. Israel as one of the innovation-friendly countries would have been a model to be studied by larger economies had the digital shekel been approved.