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Israel and Hong Kong to Test New Digital Currency

By:
Mohadesa Najumi
Published: Jun 22, 2022, 14:30 UTC

A joint retail CBDC project between Israel and Hong Kong will launch in the third quarter of this year

Hong Kong

Key Insights:

  • The joint Sela project is set to launch in the third quarter of this year.
  • A two-tier retail CBDC model could potentially lessen financial risks for customers.
  • 90% of central banks are exploring a CBDC and half are actively developing a digital version of their fiat money.

In our current financial climate, there is growing discussion of a new payment technology that could become the go-to instrument for settlement between individuals and businesses in a way that facilitates faster cross-border payments – central bank digital currencies (CBDC). Two of the latest economies to enter the fray are Israel and Hong Kong.

Namely, Israel’s central bank is working with the Hong Kong Monetary Authority and the Bank of International Settlements (BIS) Innovation Lab to test a central bank digital currency for retail.

The so-called Sela project, set to launch in the third quarter of this year, will feature a two-tier distribution model, such that it will be implemented using public-key cryptography. Central banks will act as the root certificate authority for generating digital signatures.

Importantly, findings from the retail CBDC test will be published by the end of this year as the Bank of Israel continues to step up its research for the potential issuance of a digital shekel. However, the country has been considering issuing a CBDC since late 2017.

Two-tier Retail CBDC Architecture

In accordance with a two-tier model, intermediaries involved in the transaction can handle the new CBDC with no financial exposure to their customers, unlike traditional ways of central bank funds being provided to the public via commercial banks.

According to the Bank of Israel, the CBDC enables “less financial risk for the customer, more liquidity, lower costs, increased competition, and wider access.”

The Deputy Governor of the Bank of Israel, Andrew Abir expressed that he believes the CBDC will increase overall efficiency in the Israeli payments sector.

CBDCs Around the World

This news comes as the People’s Bank of China (PBOC) tests its digital RMB (e-CNY) with around 140 million citizens, as well as at the recent Winter Olympics in Beijing.

What’s more, Jamaica became the first country in the world to officially recognize its central bank digital currency, Jam-Dex as legal tender, in a move to provide an alternative to its cash-based economy.

According to the Bank for International Settlements (BIS), 90% of central banks are exploring a central bank digital currency and half are actively developing a digital version of their fiat money. The top reasons cited were making domestic payments more efficient, with emerging markets and developing economies prioritizing financial inclusion.

Retail CBDCs are known to increase access and usability for unbanked or underbanked citizens while also lowering barriers to entry for new firms in the payments sector. By fostering innovation, retail CBDCs accelerate the globalization of services.

CBDCs, in general, can enhance monetary policy by streamlining the distribution of government benefits to individuals and improving control over transactions for tax purposes.

A broader survey by PricewaterhouseCoopers (PwC) has found that at least 80% of all central banks are considering a CBDC.

About the Author

Mohadesa Najumi is a British writer who has worked within crypto, forex, financial technology, and the stock market industry. Mohadesa received her MSc in Political Science and International Relations at the University of Amsterdam.

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