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Recently, thanks to Bloomberg, the whole world learned that Israel has completed a pilot test of its own central bank digital currency (CBDC). This was announced at a conference from the Interdisciplinary Center Herzliya by the central bank Deputy Governor Andrew Abir.

According to the official, the actual launch of CBDC will likely take a little longer than previously expected: “Previously, I assumed there was a 20% chance of getting CBDC within five years. Over the past year, my estimations have slightly increased, mainly because other countries are also developing their own digital currency projects. But the likelihood is still less than 50%”.

However, the Bank of Israel is known for its conservative forecasts. In reality, everything indicates that some highly serious work is being done by them to create their own “advanced” CBDC.

There is indeed a kind of “race” going on in the world between the central banks of different countries to develop national digital currencies on the blockchain. The motives are very different, among the main ones – the desire to refuse from or minimize the use of paper bills and coins, as well as to gain full control over the funds of citizens. The widespread adoption of cryptocurrencies has increased pressure on central banks to create a viable alternative on the blockchain before unregulated payment forms take over.

The Bank of Israel announced its readiness to launch a shekel-backed digital token back in 2017. Afterwards, however, the regulator put those plans on the back burner – for a while there was a different attitude towards cryptocurrencies among its management.

This year the bank returned to the project. In the spring, the Bank of Israel press service announced that the first stage of work on creating its own CBDC is limited to an expert assessment of the potential and likely consequences of the token’s launch for the market.

It was then that the aforementioned Deputy Governor of the central bank, Andrew Abir, said that the bank was forming a special banking committee, tasked with analyzing the prospects for the digital shekel. However, the findings of this body will be advisory in nature. When the committee completes its work, the Bank of Israel will independently decide on the timing for the development and launch of the token (according to the Basic Laws, the government cannot interfere in this area).

There is no secret in the fact that the central bank of Israel is a very conservative organization. (Suffice it to recall how long and difficult was the process of accessing the ApplePay payment system for the country.) That being said, when the regulator actually makes fundamental decisions, they turn out to be truly revolutionary.

Now experts from the Bank of Israel say that its own CBDC will help modernize the payment infrastructure and increase the availability of financial services. Bank representatives have drafted a working paper outlining the model and benefits of the digital shekel for the upcoming public consultations. The Bank of Israel has also decided to accelerate its training and research to be fully prepared for the potential future release of its digital currency. The regulator stressed that it will decide on issuing a CBDC if the positive impact of such a decision outweighs the costs and potential risks.

Now this is where we get some intriguing details. It is reported that during the implementation of CBDC the Bank of Israel will provide only minimal infrastructure based on DLT technology. Then the business will have to take part in the project on a competitive basis. But how could this be achieved? The Bank plans to create a two-tier structure. First, the central bank will offer digital shekels to private sector payment providers: banks, payment card issuers and fintech companies, including those from abroad. Next, they will distribute digital shekels among the population. As you can see, the process is supposed to be very unconventional, completely contrary to how central banks usually work.

The further we get, the more fascinating. The Bank of Israel is using Ethereum technology in its recently launched internal digital shekel test, the official said. In addition, back in May, the central bank called on Israeli fintech startups to develop ideas for intelligent applications that could be implemented in digital infrastructure.

All of this suggests that the Bank of Israel from the very beginning has thought to implement smart contract technology for the digital shekel. This way, from the outset, Israel CBDC will be more than just a digital counterpart to conventional money. State DeFi – how many have thought about this?

As a matter of fact, some have. For example, the Chinese, who are already implementing their CBDC into the government financial system. In the future, central bank digital currencies will serve more functions than simply the digital equivalent of cash, according to the former head of the digital yuan development department.

Yao Qian had been in charge of developing the Chinese CBDC until 2018. In 2019, he took up a leading role at the China Securities Regulatory Commission. He said in an interview, that one day national digital currencies will become “smarter” and work on blockchains such as Ethereum. In his opinion, CBDCs should integrate the functionality of smart contracts – this will help central bank digital currencies better serve unbanked groups of people.

It is doubtful, of course, that the Israeli national digital currency in its final form will use the Ethereum blockchain – this is too dangerous for the country’s monetary sovereignty. More likely, there will be some self-developed equivalent – something similar to Tron or, rather, Solana (its blockchain is notable for a very high operating speed, which is crucial for the CBDC of an entire country). In any case, the Israeli state currency with smart contracts will be based on a blockchain of its own design.

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