Israel’s Digital Shekel Design Document Points to International CBDC Consensus

Key Takeaways

• The Bank of Israel has published a preliminary design document for the proposed digital shekel.
• Central banks around the world are converging on shared principles for CBDC design.
• On some more technical issues, such as the question of centralized versus decentralized settlement, they remain split.

As central banks around the world advance their respective Central Bank Digital Currency (CBDC) initiatives, the Bank of Israel has published a preliminary design document for the proposed digital shekel.

The proposal underscores how many global CBDC projects are aligning around similar ideas, with an emerging consensus on key design issues such as anonymity, technical architecture and the roles of different ecosystem participants.

Israel’s Model for the Digital Shekel

The Bank of Israel envisions the digital shekel as both a retail CBDC and a wholesale CBDC, aiming to serve everyday payment needs for individuals and businesses as well as financial institutions.

As with most other proposed CBDCs, private-sector Payment Service Providers (PSPs) will handle onboarding and customer-facing services, while the Bank of Israel will oversee issuance and system rules.

To enhance user privacy, there will be no centralized database of personally identifiable information. Only PSPs will hold user data, and certain transactions below specified limits may be made anonymously.

Global Convergence in CBDC Design

Having outlined a basic design for the digital shekel, the Bank of Israel joins central banks in China, the EU, Hong Kong and other nations that have moved on to a more detailed discussion of the technical architecture.

After years of exploring different possibilities, several shared principles have now emerged across different CBDC projects.

Two-Tier Model

All major CBDC projects have now landed on the two-tier model that envisages different roles for the central bank and private sector PSPs.

While early discussions around the technology floated the idea of central banks also issuing wallets, this idea never took off.

The two-tier model reflects longstanding norms in finance. With CBDCs, bank accounts are replaced by wallets, but the basic principle of the central bank minting currency while private banks administer day-to-day transactions remains the same.

Privacy and Regulation

When it comes to privacy, a key question that has divided opinion since CBDCs were first proposed is whether transactions should be anonymous or indeed pseudonymous, as wallets will still have a unique identifier.

Privacy advocates have called for digital currencies to function like cash, enabling anonymous transactions between users. On the other hand, some regulators and lawmakers have warned that true anonymity would introduce money laundering risks and inhibit efforts to fight crime.

In recent years, central banks in the European Union, China and now Israel have come around to the compromise position: allowing low-value anonymous payments while requiring identification for larger transactions.

This model reflects rules for cash in most jurisdictions, where large transactions must be reported to authorities. However, unlike cash payments, where it is difficult to enforce limits, wallet operators will be able to automatically block large anonymous CBDC payments.

Although there is consensus on the basic principle, central banks have mentioned different possible limits. For example, the European Central Bank (ECB) has floated 3,000 euros as a potential upper limit for anonymous wallets or transactions.

CBDC Offline Functionality

Another feature of almost all proposed CBDC systems is offline functionality.

The digital shekel and other proposed CBDCs will ensure the ability to make payments even in the event of failures to critical infrastructures such as electricity and communication.

Offline functionality is one of the biggest advantages of CBDCs over existing digital payment systems.

Many proposals, including those from Europe, China, and Israel, consider storing CBDC balances and transaction data on a secure chip in a payment card, smartphone or other device.

When two devices can connect directly (for instance, via Bluetooth or NFC), the payer’s digital tokens would be transferred to the payee’s device without any round-trip to a central server.

A common approach is to treat offline functionality as an extension or layer on top of the real-time settlement infrastructure. The core ledger remains the ultimate record of ownership; the offline subsystem allows for deferred settlement under strict rules.

Central Bank CBDC Interoperability

Central banks currently exploring digital currencies have insisted that any new monetary system interoperates with existing infrastructure, ensuring seamless exchangeability between CBDCs and bank deposits.

Another aspect of interoperability they have considered is currency exchange.

Looking to a future in which CBDCs enable more frictionless currency swaps, the Bank for International Settlements has already run various experiments connecting different CBDC systems for cross-border payments.

For example, “Project Icebreaker ” brought together the central banks of Israel, Norway and Sweden to explore how their respective CBDCs would interoperate.

Divergence in Technical Architecture

During the first phase of CBDC exploration, central banks agreed to basic principles under “technology-agnostic” premises, as the Bank of Israel put it.

Now, having settled questions of functional design, they are moving on to CBDCs’ technical design.

One key question is whether or not the settlement layer of CBDCs should be centralized.

Here, there is some divergence. For example, while China’s e-CNY pilot is highly centralized, the ECB recently started testing a decentralized, blockchain-based settlement system for the digital euro.

For now, the Bank of Israel has avoided publicly favoring any one technology.

Nevertheless, references to smart contract-style functionalities and potential integrations with digital asset networks suggest the documents’ authors are well-versed in cryptocurrencies.

Moreover, the central bank envisages the digital shekel operating in a “competitive and open environment” that would preclude any overly restricted centralized system.