Key Insights
- Israel’s central bank announced plans for an interest-bearing digital shekel CBDC
- Key features include privacy protections, a two-tier model with commercial banks, and monetary policy transmission
- The CBDC will pay interest, unlike cash, while allowing instant, multi-payment transactions
JERUSALEM (MarketsXplora) – Israel’s central bank laid out plans on Saturday for a digital shekel currency that would bear interest, operate on a two-tier model allowing private banks to be involved, and protect user privacy from the central bank itself.
In a detailed report, the Bank of Israel said its central bank digital currency (CBDC) would allow for instant, round-the-clock payments and support multiple transactions, with limitations on holdings to enforce monetary policy.
Digital Shekel CBDC to Pay Interest
Crucially, the digital shekel would have the option to pay interest – a key differentiator from cash designed to allow the central bank to transmit its interest rate policy through the digital form of the currency.
“The data structure must enable the system to comply with all of the assumptions defined, including the ability to enforce holding restrictions and to apply interest,” the central bank researchers wrote.
Currently, commercial banks in Israel pay around 4.86% annual interest on shekel deposits and savings accounts. Under the CBDC model, lenders would hold the digital currency as part of their reserves but without earning interest on those holdings.
Protect User Privacy
Privacy would be protected by restricting the central bank’s visibility into individual users’ balances and transactions, with only necessary information available for operations and monitoring.
“The central bank will not have access to personally identifiable information about end users’ balances and transactions,” the announcement stated.
The digital shekel architecture envisions a two-tier model where the central bank would issue the CBDC then distribute it to the public through commercial banks and payment providers, similar to today’s system of physical cash distribution.
Other touted benefits include the ability for offline payments and setting limits on holdings to allow effective monetary policy transmission.
While Israel has been exploring the idea of a CBDC since 2021, Saturday’s report marked the first concrete outline of the project’s proposed mechanics.
The central bank acknowledged the plans were still being finalized, citing “interdependence between the various components of the digital shekel system.”
Last year, it said an Israeli CBDC could be issued if stablecoin adoption accelerated significantly, though no “substantial” stablecoin use had been detected at that time.
The release of a detailed model suggests Israel is preparing to join the growing cohort of central banks actively developing and testing digital currency technology to modernize domestic payments and defend against private crypto threats.