On June 20, 2022, the Bank of Israel, the central bank of the country, released results from an experiment they conducted to better understand smart contracts in payments and digital currency in Israel, as well as test privacy limits. 

This effort has not been the result of a recent idea, however. The central bank began to consider in late 2017 the possibilities of issuing a digital currency. In June 2021, a pilot test was conducted according to Bank of Israel deputy governor, Andrew Abir. In November 2021, the Bank of Israel began to elevate research efforts to explore the potential for a digital shekel, which would be the central bank’s digital currency. 

By 2022, the project seemed to pick up speed. In May, the Bank of Israel released a consultation to determine the idea’s public perception, with over half of the responses coming from the fintech sector. In its report on public responses, the central bank had not yet made a decision on issuing digital currency, but they noted that the public response conveyed “support for continued research regarding the various implications on the payments market, financial and monetary stability, legal and technological issues, and more.”

Instead of diving head-first into issues of a digital shekel, the Bank of Israel decided to conduct a lab experiment. The first stage of results released in June was the capability to conduct payments in order to issue and transfer digital currency between different wallets. This stage also examined usage of smart contracts, self-executing contracts that run a program once agreement terms are met, and how to avoid bank disintermediation and misuse of smart contracts. 

The second stage of this experiment involved user privacy in digital payment transactions. The Bank of Israel included this aspect in the experiment because “cash is completely anonymous, while a payment made using any digital means of payment…gives the financial entities operating the means of payment full information regarding all the details of the transaction.” User privacy for a digital shekel would likely be between complete anonymity cash has and lack of privacy e-money has. A threshold for digital payments in public policy that can be anonymous was explored after this conclusion. 

The Bank of Israel is one of many central banks engaging in central bank digital currencies initiatives. According to a Bank for International Settlements survey in 2021, nine out of 10 central banks are “exploring central bank digital currencies (CBDCs), and more than half are now developing them or running concrete experiments.” Similar efforts include Nigeria’s issuance of eNaira and China’s e-CNY.

Ultimately, regulators and governments are looking to understand the volatile market more as its influence grows in economies.

ABOUT THE WRITER

Katherine Zhang is a contributor to Identity Review from the University of California, Berkeley.

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