Most central banks around the world are considering issuing digital currencies that would curb the use of cash. The Swedish central bank, for example, released a lengthy document in September about the possibility of creating a digital Swedish currency, the e-krona. The document raises a number of questions which, at least for the time being at least, have few answers. The only certainty is that it won’t be the bitcoin, the encrypted, decentralized digital currency that is not issued by any government authority and has no clear value.
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In the case of Sweden – or Israel – any created digital currency would be identical in value to the country’s existing currency, issued and encrypted by the its central bank. The digital version wouldn’t be designed to change the country’s monetary system.
What it would be, in its limited version, is a substitute for cash. Instead of carrying around a 200-shekel banknote (currently worth about $57), Israelis could simply have a line of code on their smartphones that represents 200 shekels.
Even now, most of our transactions are carried out through code – electronic payments made by credit card or through bank transfers. However, they all currently need to be cleared though a credit card company or bank and involve computerized instructions to transfer money from one bank account to another. The entire transaction is carried out electronically, through code, but the source of the money is always a bank account.
Cash, on the other hand, sits in our wallets without any connection to our bank accounts. This would also be true when it comes to digital currency. It would sit safely in our smartphones, and we would be able to make payments directly from our phones to a convenience store owner, for instance, without involving payment transfers between banks. Instead, the line of code would pass directly from one person to another.
The source of the digital shekel would be the Bank of Israel, Israel’s central bank and the equivalent of the Federal Reserve in the United States, and it would be supplied to the public in the same way that Israelis get cash now: from their banks, from ATMs or simply through transactions between people.
One possible plan could involve digital bank accounts that people would maintain directly at the Bank of Israel, which would protect them from theft. Another option is that our digital shekels would be stored directly in on smartphones. However, if our phones are stolen, we would lose our money – just like we would if someone stole our cash-filled wallet.
One important difference in this case is that while we personally may lose our digital shekels, their existence would still be registered with the Bank of Israel; unlike cash, no one could make anonymous use of the money. That would put on dent in the black market, which uses regular cash.
Israel’s black-market economy is estimated to be the equivalent of 22% of the country’s gross domestic product. Under-the-table transactions of such magnitude mean that the treasury is losing about 50 billion shekels in uncollected taxes annually – an amount almost equal to the country’s education budget. A cash economy also provides fuel for financing terrorist activity, which is funded primarily in cash.
To address the situation, the Finance Ministry is considering a provision in the 2019 Economic Arrangements Bill, supplementary legislation that accompanies the budget, that would substantially reduce the use of cash. For example, the payment of salaries in cash would be outlawed.
Israel wouldn’t be a pioneer
As the Swedish central bank’s position paper cautioned, it’s not entirely clear if smartphone payment transactions really require a digital currency. What does the average Israeli care if the shekels she transfers through her smartphone come from her bank account, as long as she can make a payment instantly?
In a world where all payments are made by immediate fund transfers from one bank to another, the main victims would be the credit card companies. But central banks around the globe do have concerns over the power of commercial banks in a bank-based digital currency system. However, does this concern justify the technological complexity of the alternative – the creation of a digital currency?
There is no clear answer. The Economic Arrangements Bill would create a Bank of Israel panel that would consider the creation of a digital shekel. But it’s a good bet that Israel won’t be the first to issue digital currency, instead letting others try it out first and sitting tight to see what the Americans or Swedes do.
The problem is that the Finance Ministry was compelled to include the provision limiting the use of cash in the Economic Arrangements Bill because the Knesset failed to pass a bill submitted two years ago that would have done the same.
Israel is expected to pay the price for its laggard behavior in March, when a delegation from the Financial Action Task Force on Money Laundering is due in the country to consider whether Israel should be admitted as a member.
From the standpoint of the FATF, the absence of an Israeli law limiting the use of cash could lead to a rejection of its membership bid. In practice, it would mean that Israel would be excluded from the intergovernmental organization because of the Knesset's failure to pass such legislation, providing an opening for tax evasion and criminal activity. The dallying is also allowing the circulation of cash that can potentially finance terrorism. The situation would be even worse if the Knesset is not able to pass the provision limiting cash in the next Economic Arrangements Bill.