What is the Digital Shekel Challenge?

A government in wartime must mix many roles, especially in departments concerned with defense and protecting the population through military and diplomatic means.

That said, the rest of the country isn’t simply stopping until the war is over. Since Oct. 7, governmental and nongovernmental bodies have been fighting to advance several aspects of Israeli society. This includes steps to develop Israel’s economy even in the shadow of war — in which Israel’s tech sector is expected to play a major role.

Part of this progress includes the potential establishment of a Central Bank Digital Currency, or CBDC, a digital form of a country’s fiat currency that is issued by its central bank. They work similarly to cryptocurrencies, but the key difference is that the value of a CBDC is set by the central bank and is equivalent to the country’s fiat currency.

Countries around the world have been inching closer to developing or implementing their own CBDC for nearly a decade. To date, only Jamaica, Nigeria, and the Bahamas have fully launched a sovereign CBDC, but countries like Australia, Japan, South Korea, China, and the United Arab Emirates (among about 30 others) have launched pilot projects to establish a digital currency.

While this should come as no surprise given Israel’s ongoing support for technological innovation, the Bank of Israel is also taking a significant step forward in launching a CBDC.

BANK OF ISRAEL headquarters in Jerusalem: The authors say Israel’s favorable economic environment has led to an impressive improvement in the country’s credit rating. (source: YONATAN SINDEL/FLASH90)

To be clear, the Bank of Israel has been exploring the concept of a national digital currency since 2017, forming research panels and initiatives to explore how it could be implemented. However, CBDCs are very complex financial tools to develop that have broad socioeconomic implications, so it should come as no surprise that it has taken some time to develop and research how to do it properly.

With that in mind, momentum seems to be picking up. The Bank of Israel recently launched the Digital Shekel Challenge, an initiative for leaders in financial technology, or fintech, innovation to spearhead the creation of an Israeli digital ledger.

United effort

Announced last month, the Digital Shekel Challenge features 14 Israeli companies hand-picked by the central bank—from fintech mainstays like PayPal Israel to leading startups foregrounding crypto-fiat collaboration like Kima Finance. Each company selected for the project will have access to a sandbox to build their respective proposed use cases for a shekel-backed digital currency, which will then be presented at a conference in late October.

While it may seem unfair at first glance to pit large companies against startups and smaller businesses in such a challenge, it would be a mistake to underestimate the power that startups have in this context. What startups like Kima have over larger companies is that they have been building products that bridge the worlds of cryptocurrency and fiat money since their inception. Similarly, their agility to change direction and try new approaches more quickly could potentially work to their advantage.

But this challenge isn’t just about who can create the brightest product. Each participant is put to the test to see how CBDC will affect Israeli society as a whole. Of course, money isn’t everything, but it can radically change social norms, markets, and even governance.

The release of a CBDC cannot happen overnight, nor does it happen in a vacuum. It requires a solid infrastructure that can address the potential challenges of its implementation and acceptance—all of which must be addressed by the participants in this project.

More broadly, the Digital Shekel Challenge signifies that Israel is a country that takes its economic future seriously. As the economy and the technology industry converge, they will eventually become inextricably linked. Israel’s economy itself has been fueled by technological innovation for decades, and this challenge confirms the commitment of Israeli talent to defining its future.

The launch of the test version this month is further evidence of the potential success of the project in launching an Israeli digital currency, and is further proof of how innovation can help improve the country’s overall standing, both domestically and internationally.