The Bank of Israel reportedly launched a digital currency pilot program, aiming to create its central bank digital currency based on the Ethereum blockchain. However, the project might face some significant challenges.
Israel Aiming at CBDC
Many leading nations including China, Japan, France, Sweden, and more have worked for years on developing a digitalized version of their national currency.
According to a report by Globes, the central bank of Israel has joined the trend and is at the initial stages of issuing a CBDC. The institution chose the Ethereum network to achieve the move. Yoav Soffer – CBDC Project Manager at the Bank of Israel – explained why:
“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.”
The Bank of Israel created teams that set up a trial environment based on the Ethereum blockchain and issued a token representing CBDCs. Subsequently, it designed digital wallets, from which team members could exchange “imaginary digital shekels” with each other within the bank.
It is worth noting that Australia, Hong Kong, and Thailand used the same methodology in their CBDC projects and Israel also examined the legal, economic, and technological aspects.
Soffer described the initiative as “challenging.” He also pointed out that due to its complexity, it is difficult to give a finishing day for the testing project:
“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.”
During the COVID-19 pandemic, digital payment methods have been on the rise in Israel. As such, issuing a CBDC sounds like an idea that can fit into society’s new habits. Nonetheless, there are several challenges in front of it.
The Bank of Israel is not sure if it can design such a digital version of the shekel that can serve all the needs of the local population. In addition, the infrastructure for such a product seems not quite ready to uphold for the long term.
For example, Israel’s top financial institution must have a solution in case of emergency or a breakdown of the network so people can settle transactions even offline.
The central bank must also come up with a CBDC that is both accessible and competitive compared to other types of payment. Otherwise, Israelis could simply settle daily transactions with other traditional methods.
Probably the most significant challenge of them all is how to make people who use cash switch to digital payments. For better or worse, the former method is anonymous while employing a digital shekel would be closely monitored by the government, which is precisely what threatens personal privacy.
Featured Image Courtesy of GulfNews
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