New ‘E-shekel’ could ease cross-border payments says LSE report

Israeli shekels. RJA1988

A new digital currency, which would facilitate cross-border payments between Israel and the West Bank, has been proposed in a new report from the London School of Economics and Political Science (LSE).

E-shekels Across Borders proposes using distributed ledger technology to set up a platform where Israeli and Palestinian banks can exchange ‘e-shekels’. These would be fully backed by shekel deposits in a co-agency jointly owned by the Bank of Israel (BoI) and the Palestine Monetary Authority (PMA).

Digital ledger technology allows a digital asset to be exchanged peer-to-peer over a distributed network of computers, without the need for a central authority. Participants maintain and share mutually agreed records of transactions, which guards against the risk that it can be fraudulently spent twice.  

According to the report, transferring correspondent services – which enable cross-border payments –  from a bank to a digital ledger would provide several advantages over the current system. These include faster, cheaper payments, better auditing and the elimination of credit risk. It would also reduce the risk of a single point of failure, since if one participant in the payment system fails, transactions can continue via others.  Currently the system relies on one correspondent bank in Israel and one in the West Bank. 

E-shekels would be exchanged by banks only and would provide a level of anonymity comparable to that in existing deposit accounts. Participants in the payment system would be pre-vetted for money laundering and terror financing. The system would protect cross-border transactions in light of the announcement by Israeli banks in 2016 that they intend to sever correspondent ties with their counterparts in the West Bank because of concerns about risks and costs.

Priscilla Toffano, one of the co-authors of the report and Visiting Fellow at the LSE Middle East Centre, said: “A central bank-issued digital currency could ensure the survival of cross-border payments by providing Israeli and Palestinian banks with reassurance and new incentives to process transactions. This is essential given both the economic and potential security costs of not solving this problem.”

In October 2018, the Palestine Monetary Authority and the Bank of Israel announced a new Israeli government agency which would replace the Israeli correspondent bank responsible for cross-border transactions to try to solve the problem.

Kathy Yuan, co-author of the report and professor of finance at LSE, said: “We are aware of the central banks’ idea to set up an Israeli government agency to replace private correspondent banks. This agency could play a role in a distributed payment platform, such as the one we have suggested.

“We are not suggesting that the central banks implement something radical – although this technology is relatively new, it is being tested successfully, including by the central banks of Canada and Singapore. The BoI and PMA could run a pilot initially, and then roll out a small scale project.”