Financial Crime World

Palestinian Authority Eyes Digital Currency to Break Free from Israeli Control

The Palestinian Monetary Authority (PMA) is exploring the possibility of introducing a digital currency to reduce its reliance on the Israeli shekel and increase financial independence.

Limited Liquidity and Lack of Control

The PMA struggles with limited liquidity, capital buffers, and a lack of control over its monetary base. The COVID-19 pandemic has exacerbated these issues, driving stability concerns to new heights.

  • Domestic revenues accounted for an 8-9% share of GDP between 1996 and 2019.
  • Clearance revenues rose from 10 to 14%, but their flow has been repeatedly disrupted due to political tensions with Israel.

Disrupted Revenue Streams

The Israeli government collects import taxes on Palestinian trade with third countries and shares them with the PA. This sets up a mechanism for the collection of indirect taxes (VAT) on bilateral trade between Israel and the PA. The Israeli government is obligated to transfer these dues to the PA on a monthly basis, which constitutes the bulk of so-called clearance revenues for the PA.

Challenges in Gaza

Despite the challenges, the PMA has enforced a ban on cryptocurrencies in the West Bank. However, in Gaza, where wars and severe blockades have pushed many towards digital employment, the use of cryptocurrencies like Bitcoin has become increasingly popular.

  • “The lack of trust around physical assets like cash for daily needs, volatile virtual assets like cryptocurrencies can only realistically function for cross-border transactions,” said an expert on the matter.

Alternative Payment Options

The PMA’s move to explore a digital currency comes as Palestinian banks are awash with an abundance of shekels due to Israeli anti-money laundering laws. Israel also limits how many shekels Palestinian banks can transfer per month back into Israel, forcing them to borrow to cover foreign exchange payments.

  • The adoption of cryptocurrencies could provide a much-needed alternative payment option for Palestinians living in the occupied territories.
  • However, the limited internet availability and electricity shortages in Gaza pose significant challenges to widespread adoption.

Financial Inclusion

In an effort to increase financial inclusion and promote electronic payments, major corporations have been pushing for increased use of digital payments in the West Bank and Gaza. International e-commerce platforms rarely recognize Palestinian banks or payment solutions, and even when online products are ordered, items are unlikely to be received due to Israeli restrictions.

Path Forward

The PMA’s exploration of a digital currency comes as the PA continues to rely heavily on donor community and Israel to secure additional financing. The authority’s financial situation was further complicated by the end of 2020, which saw a financing gap balloon to $760 million.

  • As the Palestinian Authority looks to break free from Israeli control, the introduction of a digital currency could provide a crucial step towards increasing financial independence and stability in the region.
  • However, the move also poses significant challenges and risks, including the potential for exploitation by Israel or other actors.