Israel tightens cash controls further — is the next step a CBDC?

Starting today, a new law limits cash use in Israel.

Starting today, a new law limits cash use in Israel. Is a crypto breakthrough on the horizon?

Israel wants to digitalize its monetary system further and is turning up the screws on cash usage. According to a statement from the national tax authority (ITA), new cash-use restrictions have been in effect since August 1. Businesses may now only conduct cash transactions up to 6,000 shekels (1,760 USD). For individuals the threshold is slightly higher, namely 15,000 shekels (4,400 USD).

There are exemptions for charities, religious institutions, and Palestinians from the West Bank. Moreover, more measures will be implemented in the future, such as a ban on domestic storage of large sums of cash exceeding 200,000 shekels (58,660 USD).

The tightening follows a law that has been in effect since January 2019. It aims to crack down on financial crime. In the past, Israeli authorities have repeatedly seized crypto accounts suspected of financing terrorism. An ITA employee told the American press agency Media Line:

"The goal is to limit cash circulation in the market, especially because criminal organizations rely on it. By limiting its use, it becomes much harder to carry out criminal activities."

Critics, however, argue that the amount of cash in circulation in Israel has increased since the law took effect.

Israel works on CBDC and crypto regulation

In the meantime, the new law aligns with the Bank of Israel (BoI) plans. The central bank has been working on its own CBDC for some time. In May, it unveiled an initial concept of what a "digital shekel" could look like. A first field trial followed in June. The BoI has not yet responded to a question about the current state of development and to what extent the CBDC could fully replace its physical counterpart. In neighboring Palestine, the national monetary authority is also working on a digital central bank currency. The fragile political and economic situation leaves room for skepticism. At the same time, Israel is working hard on a regulatory framework for crypto assets. It remains to be seen when implementation can be expected.