The Israeli central bank published the findings of a lab experiment that looked at user privacy and the usage of smart contracts in payments. as part of its first technology attempt with a central bank digital currency (CBDC).
The experiment’s initial stage simulated a car sale in a two-tier structure with an intermediary payment service provider. The service provider conducted Know Your Customer (KYC)/Anti-Money Laundering (AML) checks and gave the required blockchain addresses, according to the bank.
In the lack of a licensing body to accomplish the transfer, a nonfungible token (NFT) was produced to demonstrate ownership of the car. The seller’s NFT and the buyer’s money were transferred via a smart contract, with the seller having the ability to cancel the transaction if the terms, such as the car’s price, were not met.
Two questions were raised as a result of the experiment. The first was the quantity of money stored digitally. A daily limit was recommended that may be incorporated into the smart contract to minimize bank disintermediation — the huge withdrawal of traditional shekels and conversion to digital form.
The smart contract itself was the subject of the second inquiry. It was suggested that the ability to write smart contracts on the blockchain be limited to the payment service provider to minimize the possibility of purposeful or unintentional misuse, but the level of monitoring required in that case remained uncertain.
The initial part of the trial also emphasized the importance of establishing identity in order to undertake KYC/AML using a centralized database. In the second stage, private and ordinary digital shekels were created on blockchain infrastructure in a zero-knowledge-proof environment to investigate restricted privacy using eCash technology in a range of scenarios.
Aside from simply technical concerns, the level of privacy enjoyed by digital shekel users will be a legislative concern. It’s most likely midway between cash’s complete anonymity and the lack of privacy associated with today’s electronic money transfers. Since 2017, Israel has been considering issuing a CBDC. In 2021, it conducted a pilot test.