Israel Joins Bitcoin Mania: Everything You Need to Know About the Digital Shekel

A look at how Israel's take on bitcoin would work if and when it becomes a reality

A customer uses PayPal's mobile payment application to make a purchase at a coffee shop, Tokyo, Japan, November 18, 2013.
Kiyoshi Ota/Bloomberg

An exclusive report in Haaretz's business publication about the possible introduction of a digital shekel, which would have some similarities to bitcoin, has prompted a wave of questions.

What are digital shekels? In almost every respect, they are the same as the shekels we now carry around in our pockets, but with one exception: They can only be obtained through a line of code sent to an electronic wallet, not as coins or banknotes. They would be issued by the Bank of Israel, Israel’s central bank, just as regular Israeli currency is.

Would digital shekels be bitcoin?

No. Bitcoin is a global digital currency issued by private individuals and it is not backed by any national financial institution. That’s why it’s so difficult to determine bitcoin’s real value. Digital shekels, by contrast, would be issued by the Bank of Israel, the equivalent of the Federal Reserve in the United States, and would have the same value as the regular shekels we use.

Would the digital shekel threaten the Bank of Israel’s control over the monetary supply?

Cash held by the Swedish public

No. The Bank of Israel would be issuing them, just as it issues shekel coins and banknotes, so it would also maintain control of the supply of digital shekels.

How would we pay with digital shekels?

We’d pay directly from our smartphones. For instance, a transaction would go from a customer’s smartphone to the smartphone of a storeowner.

Where would we store digital shekels?

That’s one of the technical questions that hasn’t been resolved yet. They might be kept in secure accounts with the Bank of Israel, which would mean that every Israeli citizen would have one. Or they might be stored on our smartphones, making the phones electronic wallets for all intents and purposes. In that case, however, the theft or loss of a smartphone would be like losing a regular wallet.

Israelis can already make payments using their smartphones. What would be the difference with digital shekels?

As they function today in Israel, smartphone payments are essentially a high-tech way of paying with funds from our bank accounts. This method isn't very widespread here, but it is becoming more accepted around the world. Nowadays we have the option of either presenting a credit card or using our smartphones to pay for a purchase. In either case, the merchant receives the funds from our bank account. In contrast, digital shekels would not be stored in our bank accounts but would be kept only on our smartphones themselves. Payment would not be made through the banks’ clearinghouses; it would go directly from one smartphone to another. In that respect, it’s the equivalent of cash.

What would be the advantage of using digital shekels over any other cellular payment method?

Good question – this is one of the reasons that central banks have been deliberating digital currencies but haven’t issued them yet. When it comes to instantaneous cellular payment systems, it’s not clear that consumers care whether the payment is made through digital currency – from smartphone to smartphone – or via a bank clearinghouse. But central banks view a digital currency payment system as a way of diffusing the centralized power of major commercial banks, which would assume total control if transactions always went through their clearinghouses. The digital shekel would compete with cellular payment systems offered by the banks. The aspect of competition seems to be a more important consideration than consumer convenience.

Sweden has been extensively researching a digital currency. What’s its take on the issue?

Anyone who wanted a thorough analysis of the issues involved would be interested in a report by the Swedish central bank, the Riksbank, about the prospect of issuing a digital version of the Swedish currency, the krona. At this point, however, the Swedes have more questions than answers.