The Bank of Israel has revealed the teams selected to take part in a ‘challenge’ to develop use-cases for a potential central bank digital currency (CBDC) – a digital shekel.
The deputy governor of the central bank, which is well progressed with a relatively long-running CBDC research programme, announced in April a plan for a sandbox (test-space) for the private sector to develop ‘innovative use-cases’. The following month it announced the ‘Digital Shekel Challenge’ (the shekel is Israel’s currency) to decide which projects would enter the sandbox.
The central bank has this week announced that 14 teams have been selected to develop their ideas in the sandbox, which will begin operating next month (August). A concluding conference will be held in October during which experts will judge and rank the projects.
The selected use-cases are in three different areas: connectivity between the potential digital shekel, other payment systems and cash; advanced CBDC functionalities, such as ‘sub-wallets’, conditional payments and split payments; and the ‘implementation of various technologies while using the digital shekel as a means of payment’.
The 14 teams – which include representations from international companies such as Fireblocks, IDEMIA and PayPal (Global Government Fintech lists all 14 at the end of this article) – were selected by an internal committee, which examined entries according to criteria including: innovation; ‘compatibility with the needs of the Israeli economy’; ability to support the central bank’s stated motivations for the potential issuance of a CBDC; how application programming interface (API) functionality would be used to implement the solution; and ‘prioritising broad diversity’ among selected teams.
RELATED ARTICLE Bank of Israel calls on fintech innovators to develop CBDC use-cases in new sandbox – a news story (17 April 2024) on the central bank rolling the turf for the challenge
Private-sector innovation crucial
Bank of Israel deputy governor Andrew Abir has emphasised that a decision has yet to be made to proceed with issuance of a digital shekel and that, like many other nations’ central banks, it is merely getting ready to do so ‘if and when we find it to be right and necessary’.
In this week’s (23 July) announcement he said that the challenge had created a “tremendous response.”
“We have learned quite a lot from the process thus far in building the challenge and in discussions with the teams that have shown interest, and I am certain that we will learn much more from the use-cases that will be developed by the selected participants,” Abir said. “The digital shekel’s potential to create innovation in payments will depend on the private sector’s ability to leverage the platform that the Bank of Israel will build, which is what makes this challenge so important,” he added.
In a speech in April, Abir focused on what he described as ‘a problem that the digital shekel may assist in solving’ – specifically, increasing banking sector competition.
The Bank of Israel had the previous month (March) published a 41-page document titled ‘Logical Architecture for the Digital Shekel System’ that stated that it would ‘support the option for the central bank to have the digital shekel bear interest’. A CBDC paying interest would be a different approach from many other jurisdictions. For example, UK authorities have stated that a potential digital pound would not pay interest.
RELATED ARTICLE UK CBDC architects warned against creating ‘expensive infrastructure that no-one uses’ – a UK-focused news story (21 March 2024) based on a panel discussion at a payments industry conference in London
Inspiring initiative(s)
Just over 10 months ago the Bank of Israel published results of a CBDC project undertaken alongside the Hong Kong Monetary Authority (HKMA). The findings of ‘Project Sela’, which was co-ordinated by the Bank for International Settlements (BIS) Innovation Hub’s Hong Kong centre and also involved four private companies, were presented in September 2023 in Tel Aviv.
The Sela initiative developed a distributed ledger technology (DLT)-based proof-of-concept (PoC) testing the feasibility of an architecture in which private-sector intermediaries in a two-tier (central bank-private sector) system are ‘exposure-less’ – they provide technological access to the CBDC system, conduct ‘know-your-customer’ (KYC) processes and provide customer services ‘but are not financially exposed at any point of the processes of obtaining, transferring or redeeming CBDC’.
It specifically involved a new type of intermediary – referred to as an ‘access enabler’ – located at the system’s core. An access enabler would handle all customer-facing retail CBDC services without ever ‘holding’ end users’ retail CBDC, thus eliminating the need to hold funds to ensure liquidity or to reduce settlement risk.
Potential future research areas were highlighted in the Sela report. This section included reference to Project Rosalind, an initiative involving the BIS Innovation Hub’s London centre and the Bank of England that concluded in June 2023. When he announced the sandbox plan, Abir lauded Project Rosalind, saying that it had ‘inspired’ the Bank of Israel.
RELATED ARTICLE Think you know CBDCs? An A(CID) to Z(KP) test – a feature article (26 June 2023) focused on some of the many technology considerations involved with CBDCs (the article is based on the Bank of England ‘Digital pound: technology working paper’)
API connections
In its announcement (28 May) of the ‘Digital Shekel Challenge’, the Bank of Israel said that it had built a technological prototype that ‘models the core of the digital shekel system and its APIs’.
‘Payment service providers and other service providers will receive access to the system and to a broad range of functions through which they will be able to develop services and make them accessible to end-users from the general public, and provide advanced payment options using a digital shekel,’ it stated, explaining that teams entering the challenge would be developing their use-cases using the API layer.
Project Rosalind developed a prototype API layer, with 33 API end-points in six functional categories.
It explored ‘more than’ 30 retail CBDC use cases, providing lessons on important aspects of a retail CBDC system, such as API design, privacy models, security and private sector programmability, the 36-page ‘Project Rosalind: Building API prototypes for retail CBDC ecosystem innovation’ report details.
Use-cases included peer-to-peer transfers, retail payments for goods and services and small-value business transactions. A range of payment options were tested, such as making retail CBDC payments online, in stores and offline, with the use of near-field communication and via interactions with point-of-sale, QR (quick-response) codes, mobile phones, smartcards, biometric devices and ‘smart assistants’. Some of the use-cases also explored private sector programmability and micropayments.
Digital Shekel Challenge: 14 teams
* Bits of Gold
* Brinks Israel Ltd + Committed Digital Ltd
* COTI
* Credics Technologies Ltd
* Team Energy, led by Viacheslav Pozharskii
* Fireblocks
* IDEMIA France SAS
* Kima Finance
* Open Finance Ltd
* 0xpay
* Paypal Israel Ltd
* Qedit
* Shva
* Team Levana, led by Doron Asor
Source: Bank of Israel announcement (23 July 2024)