Today, the Bank of Israel published a working paper exploring the potential of creating a network effect to encourage adoption of its central bank digital currency (CBDC), the digital shekel.

It describes three key potential triggers for generating a network effect. The government is described as “the biggest merchant in the country.” Therefore, using a digital shekel to pay fines and taxes, as well as receive benefits, would immediately create wide-scale adoption. Also, the government is the largest employer in Israel, so salaries are another use case.

The second strand of the network effect is a convenient user experience. Consumers should be able to use the same methods they use today, and so should merchants, ideally. For businesses that accept payments, the costs should be lower than current alternatives.

Third, the central bank sees the adoption of the digital shekel for P2P payments as an “accelerator for successful adoption by businesses.” The benefit is that the number of consumer users is exponentially greater than that of merchants. So every consumer who adopts CBDC will attract many other users for P2P payments.

The document also reflects on whether or not the participation of banks and other payment providers, as well as merchants, is mandatory. It explores the implementation of Brazil’s successful Pix system, which forced out larger providers which, in turn, attracted their smaller competitors and players.

Digital Shekel Use Cases

Potential use cases for a digital shekel are considered, including

• micropayments
• programmable payments
• Delivery vs. Payment (settlement of digital assets)
• Internet of things (IoT)
• decentralized finance (DeFi
• metaverse payments

One of the questions is whether to provide these apps or just enable them, which is considered less work and encourages innovation. On the other hand, it reduces the influence of the Bank of Israel on the use cases.

Another highlight of the document is the intention to support micropayments and high value payments. The latter is quite unusual for a retail CBDC.

In other recent news, the central bank said it would launch a digital shekel if the US or the EU decide to launch their own CBDCs. Israel also participated in the Icebreaker Project, a cross-border CBDC initiative with the central banks of Sweden and Norway. It was the first cross-border CBDC project to use retail rather than wholesale CBDCs.