February 28, 2024 • 7:33 am ET
The Palestinians need a reimagined payment system to rebuild their economy
Rebuilding Gaza after the war will be a massive undertaking. A recent United Nations estimate puts the cost at twenty billion dollars and will require cooperation from Israel, the United States and regional stakeholders on a range of reconstruction efforts. In addition to renewed international pressure for a two-state solution and a broader reconstruction of physical infrastructure, transforming the financial architecture that connects Gaza, East Jerusalem and the West Bank to the rest of the world should be a priority. This can help build a functioning economy in the Palestinian territories based on an effective and secure way for Palestinians to send and receive money.
The Palestinian Monetary Authority (PMA), created by the Oslo Accords and established in 1994, serves as the central bank for the Palestinian territories and oversees the thirteen Palestinian and foreign banks operating in the West Bank and Gaza Strip. However, unlike most central banks around the world, the PMA does not issue currency or conduct monetary policy. The de facto currency in the Palestinian territories is the Israeli shekel. Despite the obvious economic ties between the Palestinian territories and Israel, the free movement of money between them is restricted. After Hamas' takeover of the Gaza Strip in 2007, many Israeli banks cut or reduced their correspondent relationships with Palestinian banks due to concerns about money laundering and terrorist financing, pushing the Palestinian economy toward an even more cash-based system. This results in excessive shekel holdings in Palestinian banks, in addition to limited shekel settlement by Israel.
Ironically, the severing of ties between Israeli and Palestinian banks due to concerns about money laundering and terrorist financing has created significant vulnerabilities that enable terrorist financing. Limited infrastructure (23 ATMs per 100,000 population in 2021), limited access to banking, lack of financial literacy and inconsistent sources of income make dependence on cash even more acute in the Palestinian territories, particularly in the West Bank. Cash can be anonymous and opaque, making it a preferred means for illegal actors, including terrorists, to obtain, use and move money.
Overreliance on cash also poses challenges for the general population, as cash is difficult to track, insecure and difficult to hold in large quantities. With excess shekel holdings, Palestinian banks are unable to create capital and bank profits fall by 20 percent. Due to blockades and checkpoints, cash must be physically transported in and out of the Palestinian territories, increasing time, costs and opportunities for corruption. In addition, concerns about money laundering and terrorist financing, particularly in the West Bank, have prevented many Palestinians from opening and maintaining bank accounts, limiting their access to the international financial system and markets.
Even before the war, 80 percent of the Palestinian population was largely dependent on international aid and remittances, and this dependence is likely to only increase as a result of the war. The financial assets necessary for the flow of money into the region are broken.
Over time, Israel has tried to resolve these issues. Before October 7, Israel's goal was to keep the situation in the West Bank and Gaza Strip at what it called a “low level.” The view was that Hamas was focused on governing the Gaza Strip and not on carrying out terrorist attacks. And so, with the knowledge of the United States, Israel pursued a policy designed to allow Hamas to receive just enough financial support to prevent the situation from boiling over. In 2016, the Israeli government reached an agreement with Qatar to prevent a cash shortage in the Palestinian territories. Each month Qatar sent up to fifteen million dollars worth of cash to Gaza, intended for civil servants' salaries and humanitarian aid. Some of it was diverted to Hamas, which controlled the government and taxed residents. The Israeli and U.S. governments knew about this and other Hamas funding sources years before the October 2023 Hamas attack. Over time, the territories' increasing reliance on cash exacerbated Hamas's other means of extraction – cash is relatively untraceable and can be easily diverted to seemingly legitimate businesses. In the past, aid from Turkey, Iran and Egypt flowed through Hamas, which continues to have direct and indirect sources of income in the region.
Better financial architecture is needed in the Palestinian territories to facilitate the flow of funds to meet the needs of Palestinians while preventing diversion to terrorist groups such as Hamas and other illegal actors. While a number of financial improvements are needed, including expanding financial access and literacy, it also makes sense to look at digital finance as a tool of reconstruction, including the possibility of a shekel-backed stablecoin based on blockchain technology.
What stablecoins can do
Unlike cash, a stablecoin can be traceable and provide transparency about the flow of money into territories. As the name suggests, a shekel-backed stablecoin will require shekel reserves, which Palestinian banks have in abundance, but will not rely on the movement of physical cash. Combined with a strict anti-money laundering and anti-terrorism financing process, the stablecoin could be stored in digital wallets or physical cards. Such a stablecoin could solve two major problems facing Palestinians today. First, it would facilitate direct access to money and reduce dependence on physical cash. Second, it would enable tracking and tracing of funds to ensure diversion to Hamas and its allies can be prevented. This could still happen while ensuring the confidentiality of transactions and instilling trust in the system. A stablecoin would be faster, cheaper and more secure than alternatives currently used in Gaza.
A stablecoin alone will not solve the Palestinian territories' financial infrastructure and access problems. Even before the war in Gaza, only 80 percent of the population had access to the internet, and a modernized broadband network will be needed to enable a mobile-based banking system. (Currently, only 3G access is permitted in Gaza and only 2G access is permitted in the West Bank.) More than 80 percent of the population has access to a cell phone, but only 2 percent have actually made a purchase with it. Electricity shortages were widespread before the war and have worsened since then. Access is not the only problem. People with low and inconsistent income streams need to be encouraged to use a new system and trust in this system needs to be built. Any new technology must be accompanied by financial literacy and training.
Fortunately, there are several examples of rebuilding payment systems after conflict. When Russia launched its full-scale invasion in 2022, Ukraine was already discussing building a central bank digital currency and further digitizing its economy. Since February 2022, both private and public institutions have been working together to provide solutions that enable the movement of relief supplies to Ukraine and build domestic payment infrastructure to enable E-Hryvnia, a hryvnia-backed stablecoin. A similar solution has been applied in Afghanistan, which has similar characteristics to the situation in Gaza with sanctions against the Taliban. In 2022, an Afghanistan-backed stablecoin was distributed via HesabPay using the Algorand blockchain. Research shows that direct aid distributed through HesabPay meets humanitarian needs while preventing onward distribution to the Taliban and ensuring low costs.
A shekel-backed stablecoin could be part of the solution to an emerging humanitarian crisis as well as a building block for the future of payments in Gaza and other war-torn areas.
This realignment of financial infrastructure in the Palestinian territories requires US and EU engagement with the PMA and Israel. This also requires collaboration with regional partners such as Qatar, the United Arab Emirates, Turkey, Saudi Arabia and the broader Gulf Cooperation Council. This includes working with the intergovernmental Financial Action Task Force, which can continue its ongoing reviews and accreditations to ensure that the PMA complies with anti-money laundering and anti-terrorist financing regulations. As multilateral institutions provide aid and technical assistance to the Palestinian territories, they must prioritize projects like this, which aim to be economically sustainable and ultimately productive. This could provide an opportunity for positive international cooperation that brings long-term benefits to the Palestinian territories and the wider region.
Ultimately, the success of a shekel-backed stablecoin or other project will depend on a variety of regulatory and policy improvements, for which the PMA and other institutions will be responsible. A functioning and sustainable Palestinian economy requires a functioning payment system, and this will benefit the entire region.
Ananya Kumar is deputy director of digital currencies at the GeoEconomics Center. She leads the Center's work on the future of money and researches payment systems, central bank digital currencies, stablecoins, cryptocurrencies and other digital assets.
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Image: Palestinian women walk past a money changer in the West Bank city of Ramallah, February 16, 2010. The Palestinians do not have their own currency. Both the dollar and the Jordanian dinar are used for some transactions, but the Israeli shekel is most commonly used for everyday cash transactions. REUTERS/Mohamad Torokman
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