Bank of Israel decided to accelerate it's preparation for a possible issuance of a digital currency

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by Ifi Reporter Category:Banking Nov 29, 2021

"The Bank of Israel has decided to accelerate its study, research and preparation for the possible issuance of a future digital currency, while providing a proper response to the various risks," said Governor Prof. Amir Yaron at a conference held by the Supervisor of Banks. However, he noted that "like many other central banks, the Bank of Israel has not yet decided whether it intends to issue digital currency, and we are still examining the issue. We are committed to being at the forefront of economic and technological knowledge on this issue."
The governor said, "It is important to note that the issuance of digital currency, certainly if not carefully designed, can also involve significant risks. The main risk is possible disruption of financial intermediation, bank disintermediation. The basics - mediating between savers and borrowers and giving credit - can be harmed in a way that will cause significant harm to the economy.
"The digital shekel may also have effects on monetary transmission. Careless design of the system may also yield cyber risks, privacy risks and central bank reputation risks."
The governor also announced that Israel would cancel the Telbor interest rate on interbank loans - the Israeli equivalent of LIBOR interest rates worldwide. In Israel, it is not possible to switch to interest rates based on real transactions between banks or the repo market, because there are not many such transactions due to the high liquidity of money. Therefore, in the meantime, the Telbor interest rate will be replaced by the Bank of Israel interest rate. This move comes against the backdrop of the expected end of the LIBOR interest rate at the end of the current year. The governor said, "It is important to note that issuing digital currency, certainly if not carefully designed, can also involve significant risks. In the event that the public chooses to convert a significant portion of its deposits into the digital shekel, the ability of banks to fulfill their basic role - mediating between savers and borrowers and granting credit - may be impaired in a way that causes significant damage to the economy.
"The digital shekel may also have effects on monetary transmission. Careless design of the system may also yield cyber risks, privacy risks and central bank reputation risks."
The interest rate between commercial banks is a marker interest rate for the pricing of many assets in the economy. The best-known interest rate in this area is the LIBOR, which is set in London based on quotes of loans between about 20 commercial banks, omitting the highest and lowest results. But in recent years huge scandals have been uncovered around these interest rates, as it has become clear that some banks have influenced interest rates in all sorts of ways. The world is therefore in transition to OVERNIGHT interest rates, which are based on actual transactions in the repo market or interbank transactions, and not on "quotes" or "offers", which do not necessarily reflect the actual interest rate.

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