(Kitco News) – The Bank of Israel (BoI) has announced that it will be expediting the development of its central bank digital currency (CBDC) – the digital shekel – and plans to launch the "Digital NIS Challenge” to test an advanced digital payments ecosystem.
The new test is an offshoot of the Rosalind Project, a joint investigation between the Bank for International Settlements (BIS) Innovation Center and the Bank of England designed to develop prototypes for an application programming interface (API).
“For the benefit of this experiment, the Bank of Israel has built a technological prototype that simulates the heart of the digital shekel system at the Bank of Israel and its layer of APIs,” the BoI said in a press release. “Payment service providers and other service providers will have access to the system and a wide range of functions through which they can develop and make services available to end users from the general public and provide advanced payment options with digital shekel.”
The BoI has invited participants from the private, public, and academic sectors to take part in the experiment and explore the development of potential uses for the digital shekel system.
“Contestants will be asked to technologically develop different usage scenarios for the digital weight, using the API layer,” the BoI said. “Priority will be given to uses with original and innovative characteristics in the payment world, whether they are improvements to existing applications or are entirely new applications.”
The central bank is looking to test a variety of applications, from addressing the “unique needs of a particular population,” to serving “the needs of a particular sector or supporting an innovative application that will serve a wide range of scenarios.”
“While some use scenarios can be universal in nature, it is important that they be characterized and presented in the context of relevant uses of the Israeli economy,” the release said.
The BoI will establish an expert committee to judge and rate the projects, which will be presented at a conference that the Bank of Israel will host at the end of the process.
During the first stage of the experiment, interested parties can apply to participate in the challenge, and the BoI will select projects and teams they feel can make meaningful contributions.
Selected participants will “be able to connect to the experimental environment, and together with the project team, begin the fascinating journey of developing breakthrough use scenarios in the innovative environment of digital shekel,” the BoI said.
“The digital shekel challenge represents another step towards the means of payment of the future, with the aim of creating an innovative and competitive ecosystem of payment execution,” said Andrew Avir, Deputy Governor of the Bank of Israel. “The success of the digital shekel will depend on cooperation between the Bank of Israel and the private and government sectors. In the challenge, we first allow the financial industry from the country and abroad and another wide range of stakeholders in the payment system to collaborate with us practically in the thinking, planning and design of the digital shekel.”
The BoI first announced the launch of a sandbox environment for testing CBDC use cases in April, saying it was being done to help refine the design of the digital shekel and ensure its capacity to facilitate advanced applications.
At the time, Abir said the digital shekel “will operate on a two-tier model, with a wide range of entities that can serve as Payment Service Providers or as Additional Services Providers on the digital shekel platform,” including fintech companies, consumer clubs, and more.
“These entities will enable us to implement not only the simple payment operations we know today but will also be able to develop advanced and innovative use cases, for example in the world of Delivery vs. Payment that can reduce risk and create a wide range of new activities in the digital economy,” Abir said. “These entities will need to be regulated, but the financial supervision over them will be lighter than over the existing entities because they do not actually hold the public's money – it sits at the Bank of Israel. In this way, the digital shekel may be able to make a significant contribution to innovation and competition.”
According to a public consultation report released on May 11, “All of the responses to the public consultation indicate support for continued research regarding the various implications on the payments market, financial and monetary stability, legal and technological issues, and more.”
The one concern raised by all participants related to the CBDC’s potential for privacy breaches.
