Israel central bank teams up with Hong Kong to test retail digital currency

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Israel’s central bank is testing the feasibility of a retail central bank digital currency (CBDC). The bank teamed up with the Hong Kong Monetary Authority (HKMA) and the Bank for International Settlements (BIS) on the project, which is set to kick off within the next few months.

Bank of Israel (BOI) has been conducting research on a digital shekel for several years now. This includes collecting public feedback on the feasibility of the CBDC, a process that kicked off in May last year. As CoinGeek recently reported, despite overwhelming support from the public for the digital currency, the bank still has reservations about moving forward and made it clear that it has not decided to move forward with development.

According to the BOI, the trial will be cybersecurity secured and in the proposed model, financial intermediaries will have no exposure from the public holding or transferring the CBDC. This will result in reduced costs and risks, the BOI said, as reported by Reuters.

Despite not committing to issuing the CBDC, Bank of Israel Deputy Governor Andrew Abir says that it could increase efficiency in the Israeli payments sector.

“Providing an efficient payment system that will increase competition in the payment market is one of the primary motivations we’ve identified for a possible issuance of a digital shekel – an Israeli CBDC,” he commented.

The trial, dubbed the Selah project, will be led by the BIS Innovation Hub’s Hong Kong Center and is scheduled to begin in the third quarter of the year. The findings will be published before the end of the year, the three participants revealed.

Project Selah will test a two-tiered model in which the central banks deal directly with the consumer. This approach eliminates intermediaries such as banks. While it reduces any potential risk to them, it would also lead to disintermediation where the public may prefer to save all its money directly with the central bank. This would deny commercial banks the liquidity that they need to operate.

Various central banks worldwide are devising different ways of preventing such a situation. The European Central Bank, for instance, plans to cap the digital euro issuance to $1.56 trillion, as CoinGeek reported. However, Israel’s central bank believes this approach is the way to go.

“This architecture is assumed to have several benefits: less financial risk for the customer, more liquidity, lower costs, increased competition, and wider access,” it said in a statement.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: The BSV Global Blockchain Convention panel, CBDCs and BSV Blockchain