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Bank of Israel investigates anonymous digital shekel payments

Bank of Israel investigates anonymous digital shekel payments

The Bank of Israel has been experimenting with technology that would allow some CBDC payments to be made anonymously.

Setting out the results from its first digital shekel technological experiments, the bank says that one of its main focuses has been on finding a balance between offering the privacy afforded by cash and ensuring a CBDC cannot be used for things such as tax avoidance and money laundering.

The experiment examined a model developed by VMware that would see citizens have a wallet that can hold “ordinary” digital shekels, the transfer of which is recorded in the ledger, and “private” digital shekels, the transfer details of which are not recorded openly, and where both sides to the transaction enjoy complete privacy as with cash payments.

The bank or government would set out a periodic “budget” for payment using private shekels. For instance, each wallet would be able to pay up to 1000 shekels per month privately, and beyond that each transaction would be recorded in the ledger.

The central bank says that the experiment proved the technical feasibility of the system but there are still a host of policy questions that need to be addressed. For instance, what is the correct private budget, and is it proper to allocate the same amount to each type of wallet - private and business.

Elsewhere, the experiments - which used DLT infrastructure on the cloud, and the application of a Quorum blockchain based on Ethereum - looked at the the ability to execute basic actions including issuance and transfer of digital currency from one wallet to another.

In addition, the bank examined the ability to impose quantitative restrictions on payment transactions, and to make use of “smart contracts” for delivery versus payment transactions.

The bank says that this highlighted an important policy question: Which party would build the smart contract?

"While it is not likely that in reality the Bank of Israel will write applications for specific payment transactions, it is also difficult to assume that just anyone will be allowed to write a smart contract on the blockchain itself, since this may constitute a significant risk to the entire system," says the bank.

One answer could be that payment service providers would be allowed to write smart contracts, raising questions regarding the supervision that will be required in these areas.

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