Bank of Israel Calls Smart Contracts Great Risk to Financial System

Following a two-stage digital currency trial (called the digital Shekel project), the Bank of Israel concluded that coders of smart contracts could infuse the agreements with malicious code causing users to lose their money. The bank has published a report detailing the findings of the study.

“Allowing anyone to write these contracts is too great a risk to the broader financial system,” said the bank’s researchers. The financial organization states that it is critical to know who is coding the smart contracts responsible for processing transactions.

However, for the digital Shekel, the bank itself might not code the smart contracts; it may assign this work to payment service providers (PSPs) instead.

The bank conducted the trial in two stages. The first stage aimed to establish a cloud-based Ethereum blockchain platform, then issue the ERC20-compliant currency, and finally conduct transactions.

During this initial stage, they also explored the possibility of limiting the amount exchanged in the transaction to stop users from withdrawing large amounts of money and converting it into digital shekels. The bank also studied the use of smart contracts for delivering money to parties instead of traditional payments. Transactions were finalized using a proof-of-authority consensus mechanism.

Notably, the second stage of the study focused on the privacy afforded to participants in a digital transaction. The results corresponded with an initial proposal by the Steering Committee for the Potential Issuance of a Digital Shekel that limited the number of anonymous transactions a user could participate in.

Moreover, the Bank of Israel clearly states that this trial in no way assures the issuance of a digital shekel. The organization adds that it was merely used to help its professionals understand distributed ledger technology and the underlying open-source Ethereum ecosystem.