The Bank of Israel today published initial conclusions from the first technological trial conducted as part of the digital shekel project. The trial was involved the establishment of a distributed ledger technology (DLT) infrastructure on the cloud, and the application of a Quorum blockchain based on Ethereum. The Bank of Israel stresses that it conducted the trial in this technological environment to enable its professional teams to gain experience in the use of distributed technologies in general and Ethereum technology in particular, since this technology is an open source platform that enables the construction of a wide variety of applications.
The first stage of the trial included establishment of the platform and an examination of the ability to execute basic actions including issuance and transfer of digital currency from one wallet to another (payment). The trial also examined the ability to impose quantitative restrictions on payments, and to make use of "smart contracts" for delivery versus payments.
The trial highlighted an important policy question in this context: 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. One possible solution, the Bank of Israel found, is that payment service providers will be permitted to write smart contracts, which raises questions regarding the supervision that will be required in these areas.
The second stage of the trial focused on the issue of privacy in digital payment transactions. In the existing payment system, there are two contrary situations. Cash is completely anonymous, while a payment made using any digital means of payment - payment card, bank transfer, payment application, and so forth- gives the financial entities operating the means of payment full information regarding all the details of the transaction.
New technologies, the Bank of Israel observes, provide policy makers with a wide variety of possibilities between these two options. For instance, the trial examined an innovative technology that was recently released that enables policy makers to set a periodic threshold for digital payments that can be made anonymously, beyond which payments are documented in the system. The findings of the trial correspond with one of the motivations identified by the Steering Committee for the Potential Issuance of a Digital Shekel: providing the public with the option of using digital means of payment while maintaining some level of privacy, on condition that the rules set by the state concerning the prohibition of money laundering and the financing of terrorism, and proper disclosure to the tax authorities, are adhered to.
Published by Globes, Israel business news - en.globes.co.il - on June 20, 2022.
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