Based on the framework of Ethereum, Israel has started developing their own digital currency. The Bank of Israel has launched a central bank digital currency (CBDC) and has taken a firm step towards the future of a cashless society that may give rise to an improved e-commerce landscape, and eliminating the need for traditional banking.
The differences between CBDC and cryptocurrency
It can be difficult to distinguish between the two, especially since traditional bank-issued currency already exists in an electronic format, which is how e-banking can continue to operate. However, CBDC is not a traditional currency in the sense that it doesn’t come from commercial bank lending, but rather, from central banks and will have to maintain the currency from its own reserves rather than depending on investments.
When it comes to cryptocurrency and CBDC, the distinctions between these two digital currencies lies in the issuing source. Cryptocurrency such as Bitcoin isn’t regulated and isn’t issued by any one company, but is completely a standalone entity. Furthermore, the value of CBDC lies in direct correlation to the value of the national currency. Crypto adheres to no such economic system.
The Deputy Governor Andrew Abir confirmed that a CBDC is in the works, and that a coin has been released, but the pilot program has been met with some challenges.
“I had previously estimated that the chance of having a CBDC within five years is 20%,” Abir said. “My estimate has increased a bit in the last year, mainly because other countries are advancing with it too. But still there is less than a 50% chance.”
The challenges faced by the Bank of Israel in their bid to cultivate a functioning CBDC
One of the biggest challenges faced by the Bank of Israel and its intention to create a CBDC is ensuring that the people will use it. While they could recall physical cash and make the transition to digital shekel, the people might not be keen on doing so.
First of all, cash is largely anonymous, and people can buy whatever they want, whenever they want, with cash that they may or may not have acquired legally. With the digital shekel, everything will be traceable and monitored by the government, which, in essence, means that they will be giving up their right to privacy.
The issue of personal privacy is one thing, the accessibility of this digital shekel is another. In order to completely replace cash, the CBDC must be readily available to all, and the truth is that the Bank of Israel is not completely sure that they can make that happen, especially when you take into consideration the possibility of a network breakdown. How can the bank ensure that transactions can still be settled when the system goes offline?
The rise of CBDC and Israel’s participation in CBDC
Israel isn’t the only country that is aiming to create a digitized version of their national currency. In fact, Nigeria is the first African country to join the ranks of their CBDC peers back in October. China, Japan, France, and Sweden have also been working on bringing about a digital currency, some as far back as 2017.
According to CBDC Project Manager at the Bank of Israel, Yoav Soffer, the CBDC initiative is “challenging”. He goes on to say that there it simply isn’t possible to put a due date on these things because, “in general, projects at the Bank of Israel have start and finish dates. You know when they will end and what you need to achieve along the way. We don’t know when this project will end, with all that that implies.”
They have gone on to create a simulation based on “imaginary digital shekels” whereby teams within the bank will carry out an experiment for them to closely examine the legal, economic, and technological aspects of setting up a CBDC and whether it is sustainable or even practical. This practice was also done in Australia, Hong Kong, and Thailand for their CBDC projects before they advanced further with developing their e-currency.
He also explained why the Bank of Israel chose to go with the Ethereum network, and it’s not for the reasons one might expect, but rather due to a matter of convenience, “We did a trial with Ethereum technology, not because we think that that’s necessarily the technology we’ll use, but because it was a technology that was available for us to get our hands dirty with, in order to understand its advantages and disadvantages.”
Moving forward with CBDC in Israel
Much like every other country in the world that’s been hit hard by the Covid-19 pandemic, economies have had to adapt in order to survive. E-commerce has seen exponential growth and so digital payment methods have also become increasingly sophisticated, from blockchain-based feeder funds to virtual dealing rooms. In Israel, digital payment methods have taken the country by storm and it does seem that setting up a CBDC is the way to go, as long as they are able to address the potential problems that may arise.
While the world continues its advancement into the digital age, it makes sense for all countries that are able to jump on the bandwagon in order not to be left behind.