Israel's central bank will support a new Israeli shekel central bank digital currency (CBDC) that has the option of bearing interest.

In the March 11 announcement, the Bank of Israel outlined that its shekel CBDC will be implemented in a two-tier model, with instant, 24/7 payments, multipayment support, offline use, limitations on balances and an option for the CBDC to become interest-bearing. The central bank wrote:

"In the area of privacy, the architecture will allow the central bank, as the system administrator, to define the types of information required for the operation, control, and monitoring of the system. However, the central bank will not have access to personally identifiable information about end users' balances and transactions."

Currently, commercial banks in Israel pay 4.86% interest on customers' fiat shekel deposits and savings. Under the central bank's plans, banks would be able to hold the shekel CBDC as part of their short-term liquidity buffer, which would be non-interest bearing.

"The data structure must enable the system to comply with all of the assumptions defined in Section 2.1, including the ability to enforce holding restrictions and to apply interest," researchers wrote, adding: "In particular, in a case where the interest is dependent on the type of user and the size of the balance, there is an advantage to having a centralized database."

Israel has been contemplating the issuance of a digital shekel since 2021, but no concrete pilot tests have been actioned as of the time of publication. "Given the interdependence between the various components of the digital shekel system, the decisions are not final," said the Bank of Israel.