The recent views of the deputy governor of the Bank of Israel, Andrew Abir, on central bank digital currency (CBDC) have sparked a range of reactions within the crypto industry. While CBDC’s potential impact on commercial banks is often seen as a threat, Abir’s perspective, as outlined in a speech on the central bank’s website, offers a unique take on the matter.
Competition Fostering Innovation in Israeli Banking
Abir highlights the competitive landscape in the Israeli banking sector that has emerged over the past decade, resulting in some positive outcomes. However, he acknowledges that there is still significant progress to be made. With the recent increase in interest rates by the Bank of Israel to combat inflation, commercial banks have been somewhat slow in adjusting deposit rates, revealing areas where competition could drive improvements.
The deputy governor observes that commercial banks often struggle with public perception, a sentiment not unique to Israel. Addressing the need for enhanced competition in various market segments could mitigate the frustrations directed towards the banking system.
Confidence in the Digital Shekel
Abir expresses strong confidence in the potential of the digital shekel, which is currently in the planning stages. He believes that this new form of digital currency would garner public support. Additionally, the digital shekel could enhance the liquidity of central bank money, benefiting the Bank of Israel.
In emphasizing the transparency and accountability of the digital shekel, Abir assures that its development will be traceable to the Bank of Israel. This clear attribution can promote trust among users, unlike the anonymity associated with some cryptocurrencies. The digital shekel also presents an opportunity for the central bank to address challenges such as the declining use of central bank money due to advancements in private sector technologies.
Furthermore, Abir points out that the introduction of the digital shekel could incentivize commercial banks to offer higher interest rates to remain competitive. This mechanism would enable the central bank to have more control over the transmission of interest rates, providing a valuable tool for monetary policy management within the evolving financial landscape.
