By Steven Scheer

JERUSALEM (Reuters) – The Bank of Israel (BOI) continues to push ahead with plans to introduce a digital currency to streamline Israel’s payments system and encourage innovation, but is unlikely to launch it before other advanced economies.

“We are all waiting for the first Western central bank to pull the trigger, and it will almost certainly be the ECB. And then you can see how countries follow,” Bank of Israel Deputy Governor Andrew Abir told Reuters.

As of March, 134 countries representing 98% of the global economy were exploring digital versions of their currencies that would eventually replace cash. Some countries, such as China, are in advanced stages of pilot programs, while the U.S. Federal Reserve is lagging behind.

The BOI first began exploring a central bank digital currency (CBDC) in 2017 as a way to create a more competent payments system. It ramped up research and development in November 2020.

The bank has been experimenting with a digital shekel alongside its counterparts in Hong Kong, Sweden and Norway, as well as the Bank for International Settlements. It has invited both fintech and established finance firms to participate in its project, known as the Digital Shekel Challenge, to showcase possible employ cases.

Despite the planning and the increasingly digital world economy, the BOI still says it can’t be certain whether it will eventually launch a digital shekel. Its experiment is considered a “roadmap” to be ready when the bank deems it appropriate and necessary.

Similarly, the ECB said the introduction of a digital euro in Europe was likely but not inevitable, as it relies on cross-border payment services from elsewhere, particularly US giants such as Visa (NYSE:) and Mastercard (NYSE:).

“The most important question is whether society will adopt a digital currency,” Abir said, adding that the BOI is conducting a behavioral study on the subject.

QUESTIONS BEFORE ACTIVITY

“It’s a big leap from having some research to convincing people to use it. You have to have a good set of use cases.”

Abir wants to see a digital currency in the future that will earn interest and compete with bank deposits, as well as encourage people to own it.

Israel’s banking system is highly concentrated, with two huge banks dominating the market with over 60% share.

“The main motivation for us is to create a level playing field for payment service providers and enable them to compete with banks,” he said.

“The advantage of CBDC is that the payment provider doesn’t hold your money, so you don’t have (exposure to) credit risk to that company. This allows for a lower level of oversight and capital requirements than a traditional payment provider that holds your money, even for short periods of time.”

The digital shekel, Abir said, will allow people to pay with central bank money “everywhere and in any transaction we choose.”

If the BOI decides to introduce a digital shekel, it will most likely need the consent of the Ministry of Finance and the Ministry of Justice.

“It will take some time to see it into our lives if we decide to implement it,” Abir said. “But it has the potential to be the next revolution in payment systems.”