Iraq and Israel Advance CBDC Initiatives: Digital Dinar and Shekel on the Horizon

Can digital currencies transform the financial landscapes of Iraq and Israel? Both nations are betting on it with their Central Bank Digital Currency (CBDC) initiatives. A CBDC is a digital form of a country’s currency, issued and backed by the central bank, aimed at modernizing financial systems and enhancing efficiency. Iraq is set to launch the digital dinar to boost its payments ecosystem and reduce cash dependency, while Israel refines the digital shekel’s design, emphasizing public access and offline capabilities. These developments reflect a global trend toward CBDC adoption, balancing economic benefits with privacy concerns and operational models.

• Iraq’s digital dinar aims to enhance payments and reduce cash dependency.
• Israel’s digital shekel includes public access and offline payment features.

Iraq’s Digital Dinar: A Step Towards Modernization

Iraq, keen on digitalizing its economy, is set to launch experiments for its CBDC, the digital dinar. The Central Bank of Iraq (CBI) leads this project, aiming to enhance the country’s payments ecosystem and reduce its reliance on cash. This move is expected to lower printing costs and improve fiscal efficiency, a significant step forward for an economy looking to streamline its operations.

Muzhir Mohammad Saleh, the Iraqi Prime Minister’s financial advisor, emphasized the potential of the digital dinar:

The issuance of CBDC ‘enhances transparency, control over financial flows, and the ability to track digital liquidity and spending patterns, whether for consumption, savings, or investment.’

This transparency is anticipated to help combat money laundering, a persistent issue in the region. While specifics on privacy protections are yet to be revealed, assurances have been made that the digital dinar will follow the lead of other central banks in safeguarding user privacy. The digital dinar may also include functionalities for cross-border and offline payments, potentially boosting financial inclusion across Iraq.

However, Iraq finds itself playing catch-up in the region, with neighbors Iran and Jordan already further along in their CBDC developments. Iran, in particular, is using its CBDC to navigate around international sanctions, highlighting the geopolitical implications of these digital currencies. Iraq’s digital dinar might just be the superhero the country’s economy needs to fight the villain of cash dependency.

Israel’s Digital Shekel: Balancing Innovation and Privacy

Meanwhile, in Israel, the Bank of Israel (BOI) is meticulously crafting the digital shekel. Since 2017, the BOI has been experimenting with the concept, and the digital shekel is now envisioned as a universal means of payment, accessible to the public, including tourists and even children. Yoav Soffer, the Digital Shekel Project Manager, emphasized the importance of preparation:

The Bank of Israel has not yet decided whether to issue a digital shekel, but it is important for us to prepare, and deepen the knowledge and understanding together with the ecosystem regarding each of the possible components of the digital shekel system.

The digital shekel will support offline payments and operate under a two-tiered model, where the central bank works with private companies to manage payments. This approach aims to foster competition and innovation in the payment market. However, the digital shekel will not include programmability functionalities, which are features that allow money to be used in specific ways, like automatically paying bills.

While small transactions will keep your identity private, larger ones may be tracked, raising questions about privacy in the digital realm. Despite the enthusiasm, the BOI remains cautious about the economic viability of a retail CBDC. A significant portion of Israelis are interested in the digital shekel, anticipating it could challenge traditional financial institutions. This public interest underscores the potential for CBDCs to reshape financial landscapes, even as they face scrutiny over their economic and operational impacts.

Comparative Analysis

Iraq and Israel’s CBDC initiatives reflect distinct approaches to digital currency adoption. Iraq’s digital dinar focuses on economic benefits like increased transparency and reduced cash dependency, while also aiming to combat money laundering. In contrast, Israel’s digital shekel project emphasizes a cautious approach, with ongoing experiments and public consultations to assess its viability and impact on the economy.

Both countries lag behind some neighbors in the Middle East and Central Asia region. Iran and Jordan are further along in their CBDC developments, with Iran leveraging its CBDC to sidestep international sanctions. This geopolitical context adds another layer of complexity to Iraq and Israel’s initiatives, as they navigate the intricate web of regional dynamics and economic goals.

Future Implications

The global trend toward CBDC adoption is driven by the need to modernize financial systems, enhance efficiency, and address issues like money laundering and financial inclusion. As Iraq and Israel forge ahead with their digital currencies, they join a growing list of nations exploring the future of finance in the digital age. The potential economic impacts, privacy concerns, and public reactions will shape the success of these initiatives.

Looking ahead, the digital dinar and shekel could significantly impact their respective economies. For Iraq, the digital dinar may lead to changes in GDP, employment, and inflation as it seeks to streamline financial operations and combat financial crimes. For Israel, the digital shekel’s effects on the banking sector and public financial behavior will be closely watched, especially as the BOI continues to assess its economic viability.

The geopolitical context, particularly in Iraq’s case, will also influence the digital dinar’s development. As Iran uses its CBDC to navigate sanctions, Iraq’s digital dinar could play a role in regional financial dynamics, potentially enhancing cross-border payments and financial inclusion.

Key Takeaways and Questions

What is Iraq’s goal with the digital dinar?

Iraq aims to enhance its payments ecosystem, reduce cash dependency, improve fiscal efficiency, and combat money laundering through the digital dinar.

How will the digital dinar impact Iraq’s economy?

The digital dinar is expected to increase transparency, control over financial flows, and support efficient capital transfers, thereby enhancing economic efficiency and reducing costs associated with cash handling.

What privacy measures are in place for Iraq’s CBDC?

While specific details are not yet disclosed, Iraq’s financial advisor has promised privacy protections that will follow the lead of other central banks.

What is the current status of Israel’s digital shekel project?

Israel’s Bank of Israel has published a preliminary design for the digital shekel and is seeking public feedback while continuing experiments to assess the project’s economic viability.

How will the digital shekel function in Israel?

The digital shekel will be accessible to the public, support offline payments, and operate under a two-tiered model with private sector involvement, but it will not include programmability functionalities.

What are the potential benefits and concerns with Israel’s digital shekel?

Benefits include being a universal means of payment and lower costs for businesses. Concerns revolve around privacy, with anonymous transactions limited to below a certain threshold, and the economic viability of the CBDC.

How do Iraq and Israel’s CBDC initiatives compare to their neighbors?

Iraq is lagging behind its neighbors, Iran and Jordan, who are further along in their CBDC developments. Iran is using its CBDC to sidestep international sanctions. Israel, on the other hand, is cautiously advancing its digital shekel with ongoing experiments and public consultations.