Israel considering issuing state-backed cryptocurrency
The Finance Ministry and Bank of Israel are considering issuing a digital currency, a possible response to the frenzied cryptocurrency and bitcoin craze.
The digital shekel would record every transaction by mobile phone and make it more difficult to evade taxation, according to a finance official who spoke to The Jerusalem Post on condition of anonymity.
For several months now, regulators have been examining the possibility of a state-sponsored currency, and the government could review a tentative legal framework in January. The digital shekel would be identical in value to the physical shekel currently in use.
With cash, you make a transaction immediately, unlike with a bank transfer or check, which takes a few days to clear. Digital currency would act similarly to cash by not passing through a bank-clearing system, but rather changing hands immediately.
“You can imagine that instead of giving you a piece of paper saying the Bank of Israel on it, I can send you a piece of digital code that was issued by a central bank,” the official said, with the digital currency being stored in a digital wallet.
It is unclear where the digital wallet would be located – either in a Bank of Israel account or on your mobile phone. And if somebody stole your phone, what would happen to your digital wallet?
It is possible that central banks may see digital currencies as a threat, undermining the centralized bank-clearing system. In that light, state-sponsored digital currencies may be an attempt to compete with decentralized cryptocurrencies such as bitcoin. It remains to be seen how digital currencies will affect the lives of consumers.
With bitcoin running on blockchain technology – a digitized and decentralized public ledger that allows you to reliably authenticate transactions – the Bank of Israel is also looking into incorporating blockchain into its operations.
Yet bitcoin has faced daily volatility, with double-digit fluctuations in bitcoin-to-dollar conversions.
“Early on, when new things emerge and people struggle to understand how to value it, you get high volatility,” said Lou Kerner, a partner at CryptoOracle, a venture-capital firm and bitcoin investor. “That doesn’t mean that it’s not a thing and it doesn’t mean that it should be outlawed.”
Kerner, who visited Israel earlier this month, weighed into the recent Israel Securities Authority decision to bar bitcoin-related companies from trading on the Tel Aviv Stock Exchange.
“Governments have two options,” said Kerner. “They can either roll out the red tape or roll out the red carpet – and they roll out the red tape at their own peril. So, it turns out, these [bitcoin-related] companies will go somewhere else. And the Tel Aviv Stock Exchange loses out. It’s like saying, ‘We won’t allow Internet companies to trade.’”
A state-sponsored digital currency doesn’t exist anywhere in the world, not even in Sweden, which has made the most progress so far in shifting away from cash.
For two years, the Knesset has looked into how to reduce the use of cash, according to TheMarker. Various constituencies in Israel, which are more prone to dealing in the black market, have pressured their politicians to forestall the move.
In order to issue a state cryptocurrency, the Bank of Israel’s plans would need to be approved by the Knesset, the finance official added.
“There’s a lot that people need to think about before going through with this reform,” the official said. “We’re looking at the legal, financial, regulatory and money-laundering sides of this.”
Unlike bitcoin, where the set number of bitcoins is fixed, sovereign governments can print and issue however much state currency they desire. That hypothetically makes bitcoins more resistant to inflationary pressure – similar to gold – in terms of store value.
It may take some time for bitcoin to catch up, as the market capitalization of gold worldwide stands at some $8 trillion. The total value of all bitcoin in circulation is around $200 billion, according to Kerner.
“Gold has been a store [of] value for 5,000 years,” Kerner said. “It turns out that nothing lasts forever. And now we have something that is a far better store of value, in that it’s much easier to transmit and send and buy and sell than gold is. You can take all your bitcoins with you in a way that’s very hard for you to take your gold. A sovereign nation can take your gold but it can’t take your bitcoin.”
And given that bitcoin is only the most famous application of blockchain so far, it’s just a matter of time before a niftier, more efficient cryptocurrency replaces it. Kerner analogized bitcoin’s role to how the social-media site Friendster was eclipsed by MySpace, which was then replaced by Facebook.
“In terms of a store of value, bitcoin is better than the dollar, and something theoretically could come along and be better than bitcoin,” Kerner said. •