On Monday, the Bank of Israel published the results of a laboratory experiment that examined user privacy and the use of smart contracts in payments. This was the first technology experiment of a central bank with a central bank digital currency (CBDC).

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The first stage of the experiment simulated sale of a car on a two-level system with an intermediary payment system. The bank said the service provider had completed its Know Your Customer/Anti-Money Laundering (KYC/AML) verification and provided the required blockchain addresses. A non-fungible token was issued to show ownership of a vehicle in the absence of a licensing authority to effect the transfer. The smart contract exchanged the seller’s NFT and the buyer’s money, with the seller retaining the right to reverse the transaction if conditions on the transaction, such as the price of a car, were not met.

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The experiment drew attention to two issues. The first is the amount of money held digitally. To avoid the bank’s refusal to intermediary – the mass withdrawal of traditional shekels and their conversion into digital form, a daily limit was proposed that could be written in a smart contract. The second question was about the smart contract itself. To reduce the likelihood of intentional or unintentional misuse of smart contracts, it has been proposed that the ability to write smart contracts on a blockchain be limited to the payment service provider, but the degree of oversight required in this case has remained unresolved.

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The first phase of the experiment also highlighted the need for identity verification so that KYC/AML could be conducted through a centralized database. In the second phase, private digital shekels and regular digital shekels were created on the blockchain infrastructure in a zero-knowledge proof environment to test limited privacy based on eCash technology in various circumstances.

Apart from purely technical issues, it was noted that the level of privacy of digital shekel users would be a matter of policy. Most likely, this is something between the complete anonymity of cash and the lack of privacy that is characteristic of modern electronic money transfers. Israel has been considering issuing a CBDC since 2017. In 2021, he conducted pilot testing.