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Transformation of Traditional Cash in a Digitally Advancing Financial Landscape
Andrew Abir, the deputy governor of the Bank of Israel, recently highlighted the diminishing role of traditional cash in the realm of payments due to technological advancements that are propelling finance towards a digital future. Speaking at the “Engines of the Israeli Ecosystem” conference on April 16, Abir unveiled the introduction of a new sandbox initiative meant for testing a potential central bank digital currency known as the digital shekel.
The establishment of an API-based sandbox serves as a platform for financial institutions, fintech companies, and various stakeholders to engage in exploratory activities and develop practical applications for the digital shekel. This move is anticipated to bring about a myriad of possibilities in the financial sector.
Forging Pathways for Enhanced Competition
Abir emphasized the transformative potential of Central Bank Digital Currencies (CBDCs) as a means to stimulate an environment of healthy competition among banks. By offering versatility and accessibility, the digital shekel is poised to challenge existing digital payment alternatives, which have gradually marginalized the use of traditional cash in recent times. Through facilitating seamless digital and e-commerce transactions, CBDCs fill a critical role that conventional central bank-issued currencies are unable to fulfill.
Moreover, the introduction of the digital shekel is expected to foster competition amongst third-party services that will operate on the new platform. Participants will have the opportunity to engage as Payment Service Providers or Additional Services Providers, ultimately fostering an ecosystem of competition centered around digital shekel-based services.
By engaging in the sandbox initiative, the Bank of Israel aims to gain valuable insights into designing a robust CBDC system that can effectively support the diverse use cases created by participants in the financial ecosystem.
Evaluating the Future Prospects of the Digital Shekel
Despite the positive discourse and strides towards a potential CBDC, the Bank of Israel has refrained from providing confirmation regarding the definitive creation or issuance of the digital shekel as of April 2024. The official stance of the bank is to prepare a strategic plan that can be executed in the future, contingent upon favorable conditions that justify such a move after weighing the associated costs and risks.
Notably, the Bank of Israel has undertaken several significant initiatives related to the exploration of a digital shekel. In a recent endeavor known as “Project Sela,” the bank delved into the conceptual framework and logical architecture underpinning the digital shekel following insights gathered from an experimental phase. Furthermore, in a previous project titled “Project Icebreaker,” the bank delved into the potential applications of retail CBDCs in cross-border payment scenarios, underlining its commitment to exploring innovative avenues within the evolving financial landscape.
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