Under their 1990s accords with Israel, the Palestinians agreed not to immediately create their own currency, and their economy primarily uses the Israeli shekel, along with the Jordanian dinar and U.S. dollar.

Palestinian banks are currently awash in shekels because of an Israeli law prohibiting large cash transactions, meant to crack down on money laundering. Israel also limits how many shekels Palestinian banks can transfer back into Israel monthly. As a result, they sometimes have to borrow to cover foreign exchange payments to third parties, and are stuck with a glut of Israeli banknotes. That could be one reason a digital currency would be attractive to the Palestinian monetary system.

Two studies on cryptocurrencies are underway and no decision has been made yet, but the hope is to eventually use digital currency “for payment systems in our country and hopefully with Israel and others to use for actual payments,” Palestinian Monetary Authority Governor Feras Milhem said in an interview with Bloomberg.

It might not be feasible, however.

The Palestinian economy is inherently weak, constrained significantly by Israeli limitations on the free flow of goods and people. It relies heavily on donor money, and remittances from Israel, and World Bank estimated in February it probably contracted 11.5% last year, partly because of the Covid-19 pandemic.

The refusal by the Palestinian Authority between May and November to receive taxes collected by Israel on its behalf and a 20% drop in aid contributed to a fiscal gap exceeding $1 billion, the highest in years, it said.

Raja Khalidi, director of the Palestine Economic Policy Research Institute, said “the macroeconomic conditions don’t exist to allow a Palestinian currency -- digital or otherwise -- to exist as a means of exchange.”

However, he added, the issuance of some kind of digital money could “send a political signal to show apparent appearance of monetary autonomy from Israel.”

The Palestinians are joining monetary authorities from Sweden to China in examining the potential of national digital currencies as the dwindling use of notes and coins threatens to upend traditional payment methods. The emergence of cryptocurrencies such as Bitcoin has added to pressure on central banks to ensure they have a viable alternative before unregulated payment forms take over.

Barry Topf, former senior adviser to the Bank of Israel governor, agreed that it was very unlikely a Palestinian digital currency would be a real means of exchange. “It’s not going to replace the shekel or the dinar or the dollar. It’s certainly not going to be a store of value or a unit of accounting.”

A credit crunch has left the Palestinian private sector hurting for money, meanwhile, and the European Investment Bank has pledged $425 million in loans that Milhem wants to channel to small- and medium-sized businesses in the West Bank and Gaza Strip. Due to concern money might end up in the hands of Gaza’s ruling Hamas movement, considered a terrorist group by the U.S. and Israel, Milhem said all funds will be distributed by PMA-regulated banks.

“Our banks implement very strict rules,” he said. “They implement ‘know your client’ rules. In this case we are not worried.”