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On March 3, 2025, the Bank of Israel (BOI) unveiled the preliminary design for its central bank digital currency (CBDC), the Digital Shekel (DS), marking a significant step towards modernising the country’s payment landscape. With features such as real-time settlement, interoperability with other payment systems and digital assets, and a strong emphasis on user privacy, the DS aims to serve domestic and cross-border payment needs. The system also includes a tiered service model for payment providers, catering to varying customer requirements while maintaining compliance with anti-money laundering and counter-terrorism financing (AML/CTF) regulations.
The bigger picture
The BOI first began exploring the development of a CBDC in an effort to improve the efficiency of payment systems within the country. The research phase gained further momentum in 2020 with the introduction of the DS project.
In June 2022, the BOI published the outline and main insights from its first technological experiment conducted in the DS project. The first stage of the experiment tested core functionalities such as currency issuance, wallet-to-wallet transfers, transaction limits and the use of smart contracts, which raised key questions about who should be authorised to develop such contracts and the supervision required. The second stage addressed privacy in digital transactions, exploring technologies that allow anonymous payments below a certain threshold while maintaining compliance with AML/CTF regulations. The central bank intended to use this infrastructure to explore further applications and policy considerations as part of its ongoing assessment of a potential DS.
In June 2023, the BOI published a document discussing the adoption and acceptance of a potential DS, recognising it as a critical factor for the success of a CBDC. The document emphasised that for a DS to deliver meaningful benefits, it must achieve broad user adoption, which in turn would drive uptake among merchants and other sectors. The ability to make offline payments and improve cross-border transfers, highlighted in the bank’s participation in the Bank for International Settlements’ (BIS) Icebreaker project, which studied the potential benefits and challenges of using retail CBDCs in international payments, were also noted as potential incentives for widespread acceptance.
As part of its ongoing efforts to examine and assess the functional requirements of a DS, the BOI launched the Digital Shekel Challenge in October 2024, an experimental initiative inspired by the Rosalind Project conducted by the BIS Innovation Hub (London Centre), a leading authority in the study of CBDCs. The Digital Shekel Challenge aimed to engage local and international participants in shaping the design of a DS system capable of supporting innovative and diverse payment use cases. It evaluated the DS’ potential within the Israeli economy and gathered feedback for the BOI’s Steering Committee.
On March 3, 2025, the BOI opened a consultation on the preliminary design of the DS system, Israel’s proposed CBDC. Operating independently from existing infrastructure, the DS system ensures resilience during emergencies or system failures. It also offers potential improvements in cross-border payments. It seeks to maintain user privacy by preventing central access to identifiable information while remaining compliant with AML/CTF regulations. Payment services providers (PSPs) would be required to offer one of three tiered service packages (basic, advanced or commercial) ranging from essential onboarding and user support to additional features such as automatic, batch and cross-border payments, with fees applicable to the advanced and commercial tiers.
Israel is aligned with the development of CBDCs within the Middle East region. Project mBridge first started in 2021, with the Bank of Thailand, the Central Bank of the United Arab Emirates (CBUAE), the People’s Bank of China, the Hong Kong Monetary Authority and the Saudi Central Bank (which joined in 2024) being participants in the CBDC pilot. Since its participation in this project, the UAE has announced the new digital dirham symbol and plans to activate the CBDC in the last quarter of 2025. However, Saudi Arabia has not made much progress in developing a CBDC of its own beyond the pilot that it participated in.
Considerations for payment service providers (PSPs):
To effectively adapt to potential obligations, PSPs should:
- Engage in shaping regulatory and operational frameworks: The BOI’s consultation offers PSPs a chance to influence the DS system's foundational rules and technical design. This includes how services will be delivered, what obligations PSPs must meet and how regulatory compliance (particularly privacy, security and anti-money laundering) will be enforced. Active participation ensures that operational burdens or challenges are raised early, potentially leading to more practical and balanced outcomes. The consultation is an opportunity to provide input on the structure and viability of the three-tiered packages, helping to ensure they are both sustainable and commercially attractive. Feedback on the consultation is welcome up until April 30, 2025.
- Conduct internal readiness assessments: PSPs should begin with a comprehensive internal review of their technical, operational and customer-facing capabilities to determine how well they align with the proposed DS service packages. For example, PSPs can conduct a systems audit to evaluate whether existing architecture can support integration with the DS API layer and any other relevant technical components. Infrastructure, security protocols or cloud capabilities may need to be upgraded to enable full participation in the DS ecosystem.
- Develop or update strategic plans: PSPs should take a forward-looking view and incorporate the DS into their broader strategic and business planning. For example, building financial scenarios based on different levels of DS adoption, service uptake and pricing models. This includes estimating the cost of delivering each package, potential fee income and broader implications for customer retention. PSPs can evaluate operational, reputational and compliance risks from participating in the DS system. Data privacy, system downtime or regulatory changes affect business continuity and customer trust and should be considered. The DS system will operate independently of existing infrastructure and may require integrating new technologies and APIs. It is critical for PSPs to assess technical readiness and influence decisions on interoperability, platform access and system architecture.
- Strengthen regulatory and compliance functions: As AML/CTF regulations will govern the DS system, PSPs must ensure that their compliance frameworks are future-proofed to operate in a CBDC environment. Payment institutions may choose to update existing AML/CTF procedures to accommodate DS-specific rules, including digital identity verification, transaction monitoring for DS payments and new forms of reporting.
Taking early and concrete action in these areas will not only help PSPs comply with future requirements but also strengthen their ability to innovate, compete and lead in the evolving digital payments landscape.
Next steps
The BOI’s ongoing development of the DS represents a transformative opportunity for the future of payments in Israel. With its emphasis on innovation, resilience, privacy and interoperability, the DS system is poised to reshape how individuals, businesses and the public sector engage in digital transactions. For PSPs, the consultation period and the broader DS project present a crucial window to engage with the policy process, influence the system's design and prepare strategically for the operational and regulatory demands that may follow.
Public feedback on the proposed framework is invited until April 30, 2025.
