According to reports, the Bank of Israel has launched a digital currency pilot program with the goal of creating its central bank digital currency based on the Ethereum blockchain. The project, however, may face some significant challenges.
Israel Aims for CBDC
Many leading countries, including China, Japan, France, Sweden, and others, have been working for years to create a digitalized version of their national currency.
According to Globes, Israel’s central bank has joined the trend and is in the process of issuing a CBDC. The Ethereum network was chosen by the institution to facilitate the transition. The Bank of Israel’s CBDC Project Manager, Yoav Soffer, explained why:
“We did a trial with Ethereum technology, not because we believe it will be the technology we 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 formed teams to establish a trial environment based on the Ethereum blockchain and to issue a token representing CBDCs. It then created digital wallets through which team members could exchange “imaginary digital shekels” within the bank.
It is worth noting that Australia, Hong Kong, and Thailand used the same methodology in their CBDC projects, and Israel looked at legal, economic, and technological aspects as well.
Soffer described the initiative as “difficult.” He also mentioned that, due to the project’s complexity, it is difficult to give a completion date:
“Projects at the Bank of Israel, in general, have start and finish dates.” You know when they’re going to end and what you need to accomplish along the way. We don’t know when this project will be completed, with all that entails.”
Digital payment methods have been on the rise in Israel during the COVID-19 pandemic. As a result, issuing a CBDC appears to be a viable option that can fit into society’s new habits. Nonetheless, it faces a number of difficulties.
The Bank of Israel is unsure whether it can create a digital version of the shekel that can meet all of the needs of the local population. Furthermore, the infrastructure for such a product appears to be unprepared to support it in the long run.
For example, Israel’s top financial institution must have a solution in place in the event of an emergency or a network outage so that people can settle transactions even if the network is down.
In addition, the central bank must develop a CBDC that is both accessible and competitive in comparison to other forms of payment. Otherwise, Israelis could simply use other traditional methods to settle daily transactions.
The most difficult challenge of all is convincing people who use cash to switch to digital payments. For better or worse, the former method is anonymous, whereas the latter would be closely monitored by the government, which is exactly what threatens personal privacy.