Bank of Israel, European Central Bank (ECB), Bank of International Settlement (BIS)… In recent months, announcements of projects, studies, research on digital currency have multiplied. With the proliferation of dematerialized payments - a trend accentuated by the Covid crisis - and the rise of cryptocurrencies and stablecoins, central banks around the world are increasingly considering creating digital currencies (CBDC, for “central bank digital currency”). Even before the pandemic, in 2019, Facebook's project to create a virtual currency, now called the diem, created an electric shock.

What is a central bank digital currency (CBDC) and the differences with cryptocurrencies

There are essential differences between a CBDC and cryptocurrencies such as bitcoin.


First and foremost, while cryptocurrencies do not belong to any specific country and some are characterized by having no central authority to manage them, a CBDC will be issued by the country’s central bank (or European Central Bank for the Euro Zone), and it is the central bank that would determine its quantity, its manner of use, and the regulation that will apply to it. While many cryptocurrencies feature user anonymity, it is clear that a CBDC will be supervised and will be designed in concert with money laundering and terrorism financing prohibition (AML-CFT) rules.

Another important point is that the value of many cryptocurrencies is characterized by very high volatility, which makes them inappropriate for performing one of the basic functions of money: serving as a means of payment. In view of this, recent years have seen the development of “stablecoins”, which are designed so that their value is indexed to the value of another asset or currency. These too are issued by private entities. The ability to ensure the value of a stablecoin depends on the assets backing it as well as other factors. For instance, a hypothetical digital euro issued by the European Central Bank (ECB) would have the same conversion rate than a cash euro or  a euro in a bank account.

As the Bank of Israel points out in a study called “A Bank of Israel Digital Shekel: Potential Benefits, Draft Model, and Issues to Examine”, “it is important to note that digital money is not a new concept, and that it existed for decades before distributed cryptocurrencies exploded into the public consciousness. The money the public holds in the banking system, and which it pays through bank transfers, payment cards, payment applications, and more, is digital money.” Its existence is reflected in the computer systems of the financial institutions that provide it, and it does not exist in the physical dimension. Central bank digital money is also not a new concept. The commercial banks hold accounts at the central bank, and they charge and credit each other through these accounts on an on-going basis.

So, when we talk about digital currency recently, innovation consists of a central bank retail digital currency (retail CBDC or general purpose CBDC) giving the general public access to use the central bank’s digital money in addition to physical cash.

Digital currency around the world


In October 2020, the Bahamas became the first country to issue retail CBDC to the general public (called the “Sand Dollar”). The "Sand Dollar" is designed to extend financial services across the Atlantic Ocean archipelago of 700 islands, where commercial banks sometimes have limited reach and not everyone accepts credit cards. The system is supported by a WIFI network that is intended only for the needs of the Sand Dollar, and is supposed to be resilient to natural disasters. Citizens can pay through applications or through dedicated cards issued to them by the central bank.

In October 2020, a report entitled “CBDC—Foundational Principles and Core Features” was published by the BIS (Bank for International Settlements, the global body for central banks) together with seven central banks: the three central banks of the major developed economies (US, European Union, and Japan) and four central banks of additional leading economies (UK, Canada, Sweden, and Switzerland). On July 2021, the BIS said that central banks should work to achieve “interoperability” between their digital currency projects.


The People’s Bank of China (PBoC) has been leading the way on central bank digital currencies, with real-world trials already live in several cities with China’s digital yuan, or eCNY. PBoC backs the currency, which can then replace cash in circulation. Chengdu became the first city nationwide to accept the digital yuan as payment across its entire vast public transportation system. Other cities, including Beijing and Suzhou, have implemented pilot programs allowing subway fares to be paid via eCNY. The usage infrastructure for the eCNY is not sharply different from what Chinese consumers are already accustomed to with Alipay and WeChat Pay.

In USA, the Federal Reserve (Fed) is conducting an in-depth examination of the implications of digital currencies for the financial system and the payment system. In the Fed’s view, if it is decided to issue CBDC, it must be a payment system that will serve the public for the next hundred years. According to Fed Chairman Jerome Powell: “It’s more important for the United States to get it right than to be first.” (Bloomberg, 2020).

Europe has taken a big step towards a possible digital euro issuance in July 2021 with the launch of the “Digital Euro Project” by the Eurosystem. The investigation phase will last 24 months. “This will not prejudge any future decision on the possible issuance of a digital euro”, said the European Central Bank.

These are just a few examples. It is impossible in a single article to mention all digital currency projects. In any case, this is a movement embraced by the vast majority of central banks around the world. According to a survey conducted by the BIS among central banks each year since 2017 (Boar & Wehrli, 2021), in 2020, 86% of the central banks worked on CBDCs, compared with about 65% in 2017.

Some issues relating to digital currency

“A digital euro must be able to meet the needs of European people while at the same time helping to prevent illicit activities and avoiding any undesirable impact on financial stability and monetary policy. (…) In any event, a digital euro would complement cash, not replace it”, stated the ECB at the time of the announcement of the "Digital Euro Project”.

In Europe, the ECB must take into account the concerns of European people about the risks linked to the protection of their privacy, the top priority expressed in the recent consultation carried out by the institute. Data should be better protected with the digital euro than with equivalents offered by private providers, according to the ECB. But the road is narrow because there is no question of offering the same guarantee of anonymity as cash, for reasons of combating tax fraud or the financing of illicit activities.

The main risk is the flight of savers to this new form of money, which avoids the costs of a traditional deposit account, which would weaken banks in the Euro Zone. The ECB is therefore considering taxing deposits in central bank money above a threshold, for example 3,000 euros, said Fabio Panetta, member of the ECB's executive board, in an interview with the Financial Times.

The digital divide within societies must not be worsened either. "We will continue to provide cash," insists Fabio Panetta.

For the Bank of Israel, the weakening of the banking sector is also a problem, as well as security issues: “The main risk is that of bank disintermediation. The public’s deposits with commercial banks are a source of liquidity for the provision of credit by the banks, and if the public chooses to convert a significant portion of its deposits at the banks to digital shekels, the banks’ ability to fulfill their basic function — intermediation between savers and borrowers — may suffer, thereby causing significant harm to the economy, or they will be forced to make credit more expensive due to the decline in the supply of sources. In particular, in an extreme scenario of concern over the stability of a particular bank, the ability to “flee” with relative ease to the digital shekel may accelerate the crisis. A digital shekel may also have an impact on the monetary pass-through. If the system is not meticulously designed, it may also generate cyber risks, risks to privacy, and risks to the central bank’s reputation: A technical failure of the system may harm the public’s trust in the central bank.”

For Fabio Panetta, member of the ECB’s executive board: “Designing a new form of central bank money will involve defining operational and technological requirements and identifying the preferable options. For example, between possible ways to ensure that the digital euro is used as a means of payment rather than as a form of investment, with a view to preserving financial stability. Or between a centralised ledger, which could be easier and more efficient to handle, a distributed ledger, which may be better suited to peer-to-peer transactions, and/or local storage on a user’s device, which would enable offline payments. These aspects all have a bearing on one another. Making a coherent set of choices will be key to a smoothly functioning system.”

In conclusion, it is important to note that even if the issuance of digital currency by central banks appears inevitable, for the moment, excepting the Bahamas and the Chinese experiences, no central bank has taken the firm and definitive decision to do it.

[Oded Salomy, Director of Payment Systems and Member of Management, Bank of Israel, and Yoav Soffer, Advisor to the Deputy Governor, Bank of Israel, will take part in the FinTech Summit, as part of a new edition of ICT Spring Europe, the renowned global tech conference organized since 2010 in Luxembourg. During a session called “The Advent of a Cashless Society”, Oded Salomy will give a speech and, together with Yoav Soffer, will also participate in a “fireside chat”.]

Article by Nicolas Klein (main sources: Bank of Israel & European Central Bank)

Publié le 20 juillet 2021