Sub-wallets, interest payments, conditional transactions, and even HTLC known from cryptocurrencies – such solutions were included in the initial assumptions of the digital shekel. The Bank of Israel also explained how it intends to achieve a level of privacy “similar to” cash.
Most central banks in the world are working on a new “product” – central bank digital money (CBDC). Although enthusiasm has waned in many places and the pace of project implementation has slowed, none of the institutions have abandoned their plans yet.
Last week, the Bank of Israel presented the results of the first phase of work. The institution took a closer look at CBDC in 2017, and the extensive report published in March 2025 presents an initial vision of the operation of the digital shekel system. In many respects, it draws on the work of the Bank for International Settlements, and we have already described some solutions (e.g. regarding the so-called waterfall wallet supply) when presenting the assumptions of the digital euro. However, the document also refers to several threads less frequently encountered in digital money projects.
Risky move – interest on digital money
The digital shekel is to be a “multi-purpose CBDC” available to both non-financial businesses and consumers, the Bank of Israel emphasizes. One of the key assumptions of the project is to preserve the unity of central bank money, which is why the digital form of the currency is to be legal tender, and settlement using the e-shekel will be immediate and irreversible.
Unlike cash, CBDC is supposed to have a built-in option for the central bank to charge interest and pay it directly to end users. The report points out several advantages of such a solution:
- Strengthening the mechanisms of monetary policy transmission . A phenomenon also observed in Poland is the specific way commercial banks react to changes in interest rates. When the parameter increases, the interest rate on loans increases almost immediately and proportionally, but the interest rate on deposits reacts to a lesser extent and with a delay. Sometimes (e.g. in the case of current accounts), the rates do not change at all. “Paying interest for the digital shekel based on the basic interest rate may encourage banks to defend their deposit base and raise interest rates in a way that is more synchronized with the central bank's rates,” the report indicates.
- Stimulating competition for deposits.
- Strengthening interest in e-shekel.
The authors of the report also emphasize the risks associated with such a CBDC function. In addition to the danger of destabilizing commercial banks by “taking away” a piece of the deposit pie, less obvious but interesting threads were also listed:
- The risk of a shift in emphasis in the function of CBDC – from a medium of exchange to a store of value.
- Strengthening inequality – the digitally excluded (assuming those still using physical central bank money) will be at a disadvantage compared to CBDC users.
- Privacy perception. Although the e-shekel system allows for interest payments without the central bank knowing the identity of the wallet user, this mechanism would be difficult to explain to distrustful consumers.
- Technical challenges resulting from 24/7/365 operation and instant settlement. The Bank of Israel indicates that in this case there is no question of business days and that it would be necessary to establish rules for calculating interest other than in the case of cashless money.
The report indicates that the decision to start or stop accruing interest on digital money will be made by the central bank. If the option is treated as an area of free decision (depending on the macroeconomic environment), then a new monetary policy instrument would be created.
Conditional payments, a step towards smart contracts
The Bank of Israel strongly emphasizes that the CBDC in its implementation will not be “programmable money” , i.e. it will not have built-in rules regarding the possibility of using the e-shekel (e.g. expiration date or type of merchant). “This condition is necessary to ensure one-to-one equivalence with cash money,” the report reads.
This does not mean that other advanced features will appear. One of them is the ability to create conditional transactions. The document presents several types of operations that could be supported by e-shekel.
The first option is to build into the CBDC the equivalent of transfers with a future date, or orders with a payment schedule (so-called time-based business logic ). The second, transactions with conditions based on the type of use or user ( user and usage-based business logic ). An example would be combining this option with a sub-wallet (e.g. an e-shekel wallet for a child, separated from the parent's wallet) – the wallet user defines what transactions the child can perform (e.g. only purchases at POS) and in what types of retail outlets (e.g. only grocery stores).
The most interesting mechanism, however, is the third option – conditional transactions triggered based on external conditions ( external condition-based business logic ). The Bank of Israel indicates that digital money will not be able to verify the fulfillment of conditions itself (i.e. use mechanisms similar to the so-called oracles in smart cryptocurrency contracts). CBDC will, however, have the ability to make and release various types of locks, which allows the creation of structures similar to smart contracts:
- Bilateral blocks, i.e. blocking a specific amount in the payer's wallet, where the release of the block (cancellation of the transaction) or the triggering of the transfer is initiated by the recipient's payment service provider (PSP). An example would be “reserving” funds for an artificial intelligence agent that searches for and buys airline tickets on our behalf. The transaction is triggered by the PSP, e.g. when the seller it serves delivers the ticket.
- Three-party blockings, where the role of the transaction “switch” is played by a third party (i.e. neither the payer nor the recipient).
- Hash Time Lock Contract (HTLC), where a transaction is triggered by the use of a “secret” (provided by a third party, for example), and canceled if the transfer does not occur within a specified time. The example cited by the Bank of Israel is the use of the same “secret” to transfer ownership of an asset on an external network (e.g. a tokenized financial instrument) and unlock payment on the digital shekel network.
The assumptions of the Israeli CBDC also include several additional interesting possibilities. The e-shekel would support, among others, split payments (one payment transaction divided among many recipients) and “wholesale” transactions (so-called batch payments, a series of the same transactions directed to many independent recipients).
CBDC offline, or closer to physical cash
Much attention in the Bank of Israel’s study was paid to the privacy of the e-shekel system. The central bank points out that digital money is inferior to cash in this respect . This is not a result of technological limitations, but rather strategic goals – limiting the size of the black market, AML requirements and countering terrorism financing.
As with other CBDC projects, it is not planned to allow fully anonymous offline transactions without serious amount restrictions. As with the digital euro, offline payments will require the use of a separate wallet, which will first have to be funded from a bank account, cash or e-shekel from another “compartment”.
The system's assumptions assume that offline transactions and anonymous payments will not be covered by the payer's legal protection . While other types of operations are to provide a level of legal security similar to cashless payments (e.g. the possibility of recovering funds stolen from a wallet), in this case the consequences will be the same as in the case of cash.
Next steps – a road map will be created
The decision to issue a CBDC is not up to the central bank – this is a statement in almost every report on digital money, regardless of latitude. The same is true for the digital shekel.
The Bank of Israel emphasizes that the document only summarizes a certain stage. A “road map” for possible implementation is to be created in 2025-2026. At the end of 2026, the central bank president is also to receive a summary of further analyses and a recommendation regarding the decision.
