In a consultation on the preliminary design for a central bank digital currency (CBDC), the Bank of Israel writes that a retail CBDC (rCBDC) can, if properly designed, also function as a wholesale CBDC.
“The [digital shekel] will be a multipurpose digital currency that will address both the retail needs of end users such as households and businesses, and in this context, in particular, it can contribute to competition in the retail sector, as well as the wholesale needs of financial entities,” the BoI wrote.
Different types of users will be subject to different rules and limitations, and there may be significant differences between retail and wholesale users and use cases, the central bank added.
In addition, the digital shekel system will enable the functionality of paying interest on the held balance, which can enhance monetary transmission and competition in the deposit market. Paying interest may affect bank stability, change the perception of the digital shekel as a means of payment, and create additional costs for the Bank of Israel.
The decision on paying interest and its rate will be at the discretion of the Bank of Israel based on monetary and macroeconomic conditions, considering the associated risks and complexities. The digital shekel system will enable a functionality for the Bank of Israel to pay interest on the balance held in digital shekels directly to end users.
“The issuance of the digital shekel, if decided upon, will represent a significant transformation in the financial system in general and the payment system in Israel in particular. It has the potential to offer numerous benefits to the Israeli economy and the end-users who adopt it. However, it is important to recognize that this is a complex initiative that also involves substantial risks. This document, the result of a prolonged and in-depth design effort, was written with the aim of designing the digital shekel to deliver the expected benefits while deeply considering the associated risks and how they can be mitigated,” the central bank wrote.