Digital Currency as a Means of Public-Private Competition and Cooperation

A revolution has gathered speed over the last 15 years with digital payments becoming completely embedded in our lives, not just in developed countries, but also worldwide. As the global financial landscape continues to transform, central banks find themselves at the crossroads of innovation and stability. Among the most pressing developments is the ongoing shift from physical cash to digital payments and the importance of preserving access to central bank money. In this context, central banks worldwide are exploring central bank digital currencies (CBDC) in the quest to safeguard monetary sovereignty while adapting to an increasingly digital future.

At the Bank of Israel, as in many other countries, we are actively exploring the potential of a retail CBDC. The journey towards a digital shekel requires navigating complex challenges, including addressing financial stability concerns and ensuring that it operates within a robust framework of trust, privacy, and resilience.

As part of this journey, collaboration between the public and private sectors is essential, as each brings unique strengths to the table. In this article, I describe the top considerations for central banks as they explore CBDCs, touch on the evolving role of money, and highlight the growing importance of public-private partnerships as the Bank of Israel continues its work on the digital shekel.

The Changing Role of Cash in a Digital World

The role of cash in the financial system is progressively diminishing. Over the last decade, we have witnessed a dramatic shift away from banknotes and coins, with non-cash transactions making up an increasing percentage of all payments. In some countries, such as Sweden, the use of physical cash is nearly obsolete (Figure 1).

While cash is still used in Israel for a significant portion of consumer transactions, it is highly probable that its use will decline in the future alongside the expanding adoption of digital payments in general. The rise of innovative digital payment platforms is accelerating this trend, with consumers and businesses alike opting for faster, more convenient ways to pay.

Cash as a form of central bank money has historically served as an anchor for competition in the financial system. The public’s ability to use central bank money is essential both in maintaining the public’s trust in other means of payment, since it can always convert those payments into central bank money, and in order to maintain an alternative way for individuals and businesses to make transactions alongside solutions offered by private entities. As an example, merchants can refuse to take on high credit card fees by asking customers to pay with cash instead; however, in a cashless world this option disappears, allowing the financial system’s big players to wield greater power and charge higher fees without fear of competition.

By introducing a CBDC, central banks can reintroduce this competitive pressure. A digital currency that is ...

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