Israel prepares to launch its CBDC. All the details

The Bank of Israel has released a paper on the architecture design of its central bank digital currency (CBDC), the digital shekel.
It differs from other CBDCs in several aspects.
One of them is the ability to pay interest.
Another is the separation of the role of banks from the provision of wallets and payment services.
The central bank is likely to publish more documents this year as the target date for a design document is December 2024.
The central bank has yet to make technology decisions, such as whether to use DLT technology, so the document only covers functional architecture.
In most retail CBDCs, a user would have a CBDC wallet with a bank or payment provider they already have a relationship with.
The same provider helps fund the CBDC wallet directly and communicates the CBDC payment instructions.
In contrast, Israel's central bank imagines a different solution.
Therefore, a user can open a wallet with a PSP and connect to one or more third-party banks for financing via open banking APIs.
The ability to access financing is crucial for most CBDCs.
This is because when a user makes a payment and has insufficient digital shekels, there will be a need for a so-called “reverse waterfall” from a bank to top up the CBDC balance so the payment can be completed.
If your digital shekel balance exceeds any imposed limits, your funds will be transferred to a linked bank or PSP account.
Many banks see CBDCs as a threat.
One of the few advantages for banks is their potential role in managing consumer portfolios.
In the Israeli model, banks lose that benefit in addition to competing with a potential interest-bearing CBDC.
From a consumer perspective, there is a possibility that they will choose existing providers for CBDC to avoid having to deal with know-your-customer (KYC) compliance.
Another innovative aspect concerns a centralized database.
The data controlled by the central bank will be divided into two parts.
It operates the CBDC platform which is responsible for recording all transactions.
In a token-based scenario, that system wouldn't necessarily have a global view of a person's balance.
However, account balance information can be used for various purposes.
Therefore, whether the system is account-based or token-based, the Bank of Israel wants a separate centralized database with pseudonymized account balance information.
The central bank itself would not have access to personally identifiable information, but would likely know the identity of company balances.
It is currently thought that personal data would be stored in the central database but encrypted.
Therefore, only the PSP with the customer relationship would have read access to that information.
This approach may raise more privacy concerns than the European Central Bank's approach.
Another feature considered in the architecture document is whether the central bank would have a direct or indirect relationship with banks regarding financing.
In other words, when consumers receive their digital shekels, they would get them directly from the central bank or the bank to which the consumer paid to purchase the digital shekels.
The Bank of Israel has opted for an indirect method that works similarly to cash.
Banks buy digital shekels from the central bank in bulk and pass them on to customers when they fund their portfolios.
There are some similarities between some of the projects considered here and another CBDC project involving the Bank of Israel and the Hong Kong Monetary Authority – Sela Project.
Meanwhile, the Bank of Israel last year published documents on how to encourage CBDC network effects and what events would trigger a decision to launch the digital shekel.
read also The government sells off everything: state-owned companies for sale