The Bank of Israel is working with the Hong Kong Monetary Authority to experiment with a new central bank digital currency.
Once launched in the third quarter, the joint CBDC project will use a two-tier system. This means that after central bank issuance, the digital currency will be distributed to consumers through financial intermediaries.
A retail CBDC is designed so that intermediaries can deal with it without presenting financial risk to customers. Part of the tests in Israel and Hong Kong will determine whether this reduces their exposure to cyberattacks.
According to the Bank of Israel, a “risk-free” CBDC could “reduce financial risk, increase liquidity, reduce costs, increase competition and wider access for customers”. The innovation arm of the Bank for International Settlements will also participate in the collaboration.
Global CBDC Demand
This marks the closest Israel has come to exploring the idea of a CBDC. Initial efforts in 2018 were shelved when the central bank team opposed the issuance of a digital version of the shekel. According to the International Monetary Fund (IMF), Israel is one of 100 countries in the world considering issuing a CBDC.
China’s digital yuan has been tested by some 140 million people, including during the recent Winter Olympics in Beijing. A Bank of England official said recently that a digital version of the currency would be in line with the central bank’s mission. The Bank of Jamaica recently recognized its CBDC as legal tender, becoming the first country in the world to do so.
According to Bank of America analysts, it is inevitable that central banks will launch their own digital currencies. On the one hand is the risk of losing monetary sovereignty by private issuers such as social networks or decentralized finance. However, there is also the risk of losing correlation to larger, broader digital coins such as the digital dollar or digital euro.
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