What a CBDC Will Mean for Israel?

Digital currencies have their ups and downs, but they are certainly here to stay. Bitcoin saw record upswings in 2021 with predictions it would reach 100,000 before pulling back to 37,857. Central banks around the world are exploring the possibilities of issuing digital currencies. Israel is also researching the benefits and risks of its own CBDC (Central Bank Digital Currency).

What Is a CBDC (Central Bank Digital Currency)?

A CBDC stands for “Central Bank Digital Currency.” They are like other digital currencies, except that they are regulated by the central monetary authority of a country. Regular digital currencies, like bitcoin and there are not regulated by central banks or other government entities but by the blockchain.

Digital currency is wholly virtual and has no physical equivalent. There are no bills and coins, but only digital “coins” stored in a virtual “wallet.” Digital currencies or cryptocurrencies have risen dramatically in popularity in recent years. They provide convenience for online transactions but also carry certain risks.

Transactions with most cryptocurrencies are recorded and managed on the blockchain. One main criticism of cryptocurrencies is that there is a lack of centralized and government regulation.

The prevalence of cryptocurrency fraud and the anonymity of transactions have made digital currency attractive to cybercriminals as well as legitimate users. CBDCs are meant to combine the convenience of digital currencies with the oversight and security of centralized government regulation.

Which Countries Are Adopting CBDCs?

According to a survey of Bank of International Settlements, or BIS, 80% of countries are currently involved in initial research for adopting CBDCs, 50% are actually testing these currencies in experimental procedures and 10% say they expect to issue CBDCs within the next three years.

China, Sweden, the Bahamas, the Eastern Caribbean Currency Union, and the Marshall Islands have made significant headway in research on the development of CBDCs.

Will Israel Release a CBDC?

Israel is included in the list of countries currently exploring the options of issuing a CBDC. The Bank of Israel said it is creating an “action plan” for the eventual release of a digital shekel, but provided no specific timeframe, according to the Times of Israel.

The Bank of Israel also stated that the actions were exploratory and intended to measure the benefits and risks of a CBDC, and that “the Bank of Israel has not decided yet whether it intends to issue a digital currency.”

The exploration committee for the potential digital shekel will include those in the financial, payment, and technology sectors as well as academics and government officials. The Bank of Israel developed a draft model of the digital shekel along with a study entitled, “A Bank of Israel Digital Shekel – Potential Benefits, Draft Model, and Issues to Examine.”

It is clear the Bank of Israel is taking significant steps to explore the issuance of a digital shekel, but it is still not committing itself to release a CBDC and is tempering expectations until the committee determines the advantages of a digital shekel outweighs the risks.

What does a Digital Shekel mean for Israel’s Economy?

Although most consumers use something akin to digital currency through internet payment platforms and online banking, digital currencies are different because they are not levered to physical currency.

Because of this, they have tended to be volatile. Bitcoin ran from $10,000 to nearly $50,000 in less than a year. Amid predictions Bitcoin would reach $100,000 by the end of 2021, as of May 2021, it dropped to $37,857 as Tesla CEO Elon Musk, after a $1.5 billion investment in the cryptocurrency, later said Tesla would not accept Bitcoin as payment due to serious environmental concerns.

Although some see this as Musk’s pressure on Bitcoin to find greener alternatives to cryptocurrency mining, and the value of Bitcoin may correct when this issue is resolved, the extreme upward movement in Bitcoin and staggering drop based on the comments of one major CEO illustrates the volatility of cryptocurrencies

The fact that Bitcoin is considered more stable than many other crypto assets, despite its steep rises and falls, speaks volumes about risks and digital currencies in general.

As it does in many other areas, from preventing terrorism or dealing with COVID-19, Israel will most likely approach CBDC prudently and after thorough research and evaluation of the benefits versus the risks. The release of a digital shekel may lead to more investment opportunities, but also greater currency fluctuations, which is one reason Israel Central’s Bank is exploring these avenues with caution.

Although it is not certain that Israel will issue a CBDC, in the meantime, an ETF-based fund is the best way to invest in Israel’s economy. The Jerusalem Portfolio is ideal for first-time and veteran investors and can be started with as little as $180. You can open the Jerusalem Portfolio for your own investment or give it as a gift that will appreciate in value.

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Published on 28th May 2021 
The Jerusalem Portfolio