Israel’s Interest-Bearing Shekel CBDC Plan

Israel’s central bank has announced plans to create a central bank digital currency (CBDC) known as the New Israeli Shekel (ILA). This CBDC will have the unique feature of being able to bear interest. The Bank of Israel outlined that the ILA CBDC will be implemented in a two-tier model, allowing for instant, 24/7 payments, multi-payment support, offline use, limitations on balances, and the option for it to become interest-bearing.

Currently, commercial banks in Israel offer 4.86% interest on customers’ fiat ILA deposits and savings. Under the central bank’s plans, banks will be able to hold the ILA CBDC as part of their short-term liquidity buffer, but it will not bear interest. Researchers emphasize the importance of a data structure that allows for the enforcement of holding restrictions and the application of interest. They believe that having a centralized database would be advantageous, especially when the interest varies based on the user type and balance size.

The idea of a digital shekel has been contemplated in Israel since 2021, but no pilot tests have been conducted yet. The Bank of Israel states that the decisions regarding the issuance of the ILA CBDC are not final and are contingent on the interdependence of various components within the digital shekel system. In April 2023, the central bank mentioned that an ILA CBDC could be introduced if there is an increase in stablecoin usage for payments. At present, there is little evidence of substantial adoption of stablecoins for payments in Israel.

The Bank of Israel is moving forward with plans to support a central bank digital currency that offers the option of bearing interest. The ILA CBDC aims to provide efficient payment solutions and offline usability. It will also allow commercial banks to incorporate it into their liquidity buffers. Further testing and examination of the digital shekel system are still required before final decisions can be made.