Cryptocurrency (illustrative)
Cryptocurrency (illustrative)iStock

The immense growth of Bitcoin and cryptocurrencies, in general, is spurring central banks into action. Chief amongst them is China's central bank, which is now amid a massive rollout of its digital currency and is preparing for a full launch of the digital yuan to coincide with the Winter Olympics. For the Chinese government, a digital currency can act as a useful deterrent against a pirate banking system and financial crime and serve as a tool for projecting its economic might in the international arena.

What is a Central Bank Digital Currency (CBDC)

While the digital yuan project is progressing vigorously, it is by no means the only example of Central Bank Digital Currencies being developed. China has spurred other countries to accelerate their research and development into CBDCs. In the United States, too, they are glaring with envy at their eastern rivals. US Treasury Secretary Janet Yellen recently noted that the US digital currency (Fedcoin) could lead to "faster, safer and cheaper payments" by bypassing the broker between commercial banks or credit card networks.

CBDCs are about more than just digitizing money. In fact, only an estimated 3% of all dollars in existence are in physical form. What CBDCs will enable is a direct link between governments and its citizens, bypassing commercial banks and other intermediaries. The ‘direct-to-consumer’ model could give governments a host of new tools to affect their economies. For example, governments could eliminate stimulus checks and instead ‘airdrop’ cash directly to the people whenever needed. Aside from the additional benefits, CBDCs could lower the commissions of ongoing banking operations by cutting out the middlemen in between government and the people.

Recent reports indicate that the Bank of Israel is moving in the same direction and is also examining the possibility of issuing a digital shekel. Like most banks worldwide except the Central Bank of China, The Bank of Israel is still in the exploratory phase. At this point, many questions remain open on the table, so it is impossible to talk with certainty about the structure of the digital shekel. Nevertheless, it's never too early to ensure that any proposed digital shekel framework will respect individual freedom and work for the citizens of Israel.

Many like to use the term 'big brother' to draw an image of a horror show whereby an administration penetrates the privacy of its citizens through advanced technology. In the case of the digital shekel, are these concerns justified, or is this just mass-scale paranoia? It seems that these concerns are closer than ever to reality, especially in the wake of the increased surveillance and reduced privacy since the outbreak of the coronavirus in our country.

A digital shekel may take the move away from privacy one step further. Not only could it enable the government to track our financial operations, but also a digital shekel could grant them the power of direct enforcement. The government will have the ability to know what each person is doing with each of his shekels. They will be able to restrict everyone from using their money for whatever reasons the government decides. For example, the government could decide to ban us from buying chametz (leavened products - ed.) on Passover, or even collect taxes and fines immediately - because it simply can.

The reason for this lies in the technology that enables digital currencies, blockchain technology. In essence, the blockchain is a central digital ledger - in which every action taken within the network is recorded. Bitcoin and other cryptocurrencies use an open and distributed ledger where no one has exclusive control, and anyone can track the flow of funds on-chain. The digital shekel may work in an opposite way. Like other government digital currencies, the digital shekel will likely be based on a closed ledger under the complete control of the Bank of Israel and government ministries. Digital shekel planners are still debating between blockchain and other technologies, but one way or another, the project could escape the values ​​of openness, transparency, and equality inherent in Bitcoin.

Ultimately, it is not enough that a CBDC may not promote the values ​​of Bitcoin like financial freedom and privacy protection; it may even lead us to a reverse dystopia where a citizen has no free space of action. The Bank of Israel and its leaders should be mindful of the risks inherent in closed digital currencies and prioritize individual freedoms over the accumulation of government power. If these freedom-promoting efforts aren't made ahead of time, any government attempt at digital currency will ultimately fail. After all, humans were born free and are meant to live a free life. And it is necessary to wonder whether digital government money is not merely a form of innovative prison?