How sovereign monetary authorities are acquiring battle-tested blockchain rails at distressed valuations — and why Israel should be paying attention

There is an old adage in finance: never let a good crisis go to waste. Central banks, those stately custodians of monetary orthodoxy, appear to have taken this maxim to heart. Across the globe, sovereign monetary authorities are quietly acquiring the plumbing of the cryptocurrency ecosystem — the custody solutions, the settlement protocols, the tokenisation platforms — at valuations that would make a vulture fund blush. They are picking up battle-tested infrastructure that the private sector built, refined, and then, in its characteristically manic-depressive fashion, abandoned.

The scale of the abandonment is staggering. Between November 2021 and the end of 2022, the global crypto market capitalisation collapsed from $3 trillion to $800 billion — $2.2 trillion in value destroyed in barely a year. The BIS calculates that over $1.8 trillion dissolved across the Terra/Luna and FTX episodes alone. Celsius, which managed over $20 billion in client assets, filed for bankruptcy with a $1.2 billion balance-sheet deficit. Venture capital investment in crypto firms plummeted from $32 billion in 2021 to under $10 billion by 2023. But the infrastructure — the distributed ledger technology, the smart contract architectures, the cross-border payment rails — survived intact. It is rather like a property crash that destroys the paper wealth of speculators while leaving perfectly serviceable buildings standing. Central banks are now walking through the wreckage with chequebooks, picking up keys to buildings whose construction costs they never bore.

The evidence is not circumstantial; it is architectural. The BIS’s flagship mBridge project — a cross-border CBDC settlement platform involving China, Hong Kong, Thailand, and the UAE — is built on a blockchain that is fully compatible with the Ethereum Virtual Machine, the execution environment created by Vitalik Buterin’s open-source project and refined by billions in venture capital. Its smart contracts are written in Solidity, Ethereum’s programming language. Its original consensus mechanism, HotStuff+, was developed by VMware Research with academic collaborators from Cornell and Duke before being quietly replaced by a Chinese-designed alternative. The entire Ethereum ecosystem’s tooling — the auditing frameworks, the developer libraries, the security protocols — can plug directly into mBridge without modification. Central banks did not pay for any of this. The venture capitalists and token holders who funded Ethereum’s development did, and most of them are underwater or bankrupt.

The pattern repeats across jurisdictions. The European Central Bank’s digital euro prototype draws on tokenisation frameworks pioneered by firms that have since collapsed or been acquired at fractions of their peak valuations. The People’s Bank of China’s e-CNY leverages distributed ledger concepts refined through billions of dollars of private-sector R&D that Beijing never funded. In each case, the sequence is the same: the private sector bears the cost of experimentation, the technology matures, the speculators are destroyed, and the central bank walks in to collect the proven infrastructure.

Israel, of all nations, should understand this dynamic intimately. The Start-Up Nation has long been the laboratory where financial technology is conceived, prototyped, and battle-tested — only for the scaled deployment to occur elsewhere. Israeli firms were pioneers in blockchain security, zero-knowledge proofs, and decentralised identity solutions. Tel Aviv produced some of the most sophisticated smart contract auditing firms in the world. Yet the Bank of Israel’s digital shekel project, like its counterparts in Frankfurt and Beijing, is poised to harvest the fruits of this innovation ecosystem without paying anything remotely resembling the sunk cost.

Indeed, the Bank of Israel is already doing it in plain sight. It is an official observing member of the mBridge project — watching, learning, absorbing the architecture that private-sector capital built. More tellingly, in 2024 the Bank ran a Digital Shekel Challenge featuring fourteen participants, including Fireblocks, PayPal, COTI, and QEDIT — Israeli-founded firms whose intellectual property and R&D were effectively auditioned for sovereign use. The March 2025 preliminary design document was pointedly described as ‘technology agnostic,’ a euphemism that translates, in practice, to: we will select from whatever the private sector has built, once we have seen what works. Project lead Yoav Soffer has described the digital shekel as ‘central bank money for everything.’ The ambition is total. The R&D budget is someone else’s.

This is not, strictly speaking, theft. It is something more structurally profound. Central banks possess a unique advantage — they can wait. They are not subject to quarterly earnings calls, redemption requests, or margin requirements. Their time horizon is, in principle, infinite. They can observe private-sector experimentation at a safe remove, knowing that whatever useful innovations emerge from the chaos, they can replicate once the dust settles and the developers are too depleted to object.

The obvious counterargument is that much of this technology is open-source, designed from the outset to be freely used. Ethereum’s code is public. Solidity is permissionless. The entire ethos of the blockchain movement was that infrastructure should be open, composable, and available to all — including central banks. If the crypto community did not want sovereigns to adopt its tools, it should not have made them freely available. This is a fair point, as far as it goes. But it does not go far enough. The open-source code is the skeleton; the years of stress-testing, the security audits, the regulatory navigation, the enterprise integration — this is the muscle and sinew, and none of it was free. Ethereum’s EVM compatibility did not arrive at mBridge by accident. It arrived because billions of dollars of private capital proved it worked under hostile conditions. Central banks are not adopting a concept; they are adopting a production-grade system — and paying nothing for the proving.

The risk to this dynamic is severe. If every central bank pursues the same approach — waiting for the private sector to solve the hard problems, then appropriating the solutions — the incentive structure for future innovation collapses. This is moral hazard in reverse. In the 2008 financial crisis, the concern was that bailing out banks would encourage reckless risk-taking. In the crypto context, the concern is that systematic appropriation by sovereigns will discourage risk-taking altogether. Why would any rational entrepreneur invest in financial infrastructure if the expected outcome is that the state will simply take the output once it is proven to work?

For Israel, this carries a specific strategic implication. The country’s fintech and blockchain ecosystem — firms like StarkWare and Fireblocks, both valued at $8 billion at their peaks, and Bancor, whose record-breaking $153 million ICO in June 2017 briefly held the title of largest token sale in history — represents not merely commercial value but a form of national technological capital. If central banks globally continue to absorb crypto infrastructure at distressed prices, the venture capital that sustains these Israeli firms may begin to redirect toward sectors where the fruits of innovation cannot be so easily appropriated by sovereigns. Israel’s competitive advantage in financial technology could erode not because of any failure of ingenuity, but because the returns to that ingenuity are being systematically captured by the very institutions the technology was designed to disintermediate.

The irony is exquisite. Satoshi Nakamoto’s original Bitcoin white paper was, at its core, a manifesto against central bank monetary discretion. Nearly two decades later, the technology spawned by that manifesto is being absorbed into the central banking apparatus at fire-sale prices. The revolution has not merely been co-opted; it has been acquired in a leveraged buyout where the leverage was provided by the revolutionaries’ own excess and the buyout price was set by their subsequent bankruptcy.

Israel, sitting at the intersection of technological innovation and geopolitical volatility, has a particular interest in ensuring that this appropriation does not become a one-way valve. The Bank of Israel should structure the digital shekel not as an exercise in technology adoption but as an exercise in technology partnership. Concretely, this means moving beyond challenge competitions and observer status. It means equity stakes or long-term licensing agreements with the Israeli firms whose R&D underpins the architecture — arrangements that ensure Fireblocks, QEDIT, and their peers are not merely auditioned but compensated as ongoing infrastructure partners. It means a sovereign innovation fund, modelled on Singapore’s approach, that recycles some of the value captured by the CBDC back into the domestic ecosystem that made it possible. And it means enshrining in the digital shekel’s governance framework a commitment that Israeli-developed technology will not simply be extracted and replicated without attribution or remuneration.

Otherwise, we are left with a remarkable spectacle: the most disruptive monetary technology since the invention of double-entry bookkeeping, built by visionaries and speculators at a cost of trillions, being handed to the institutions it was designed to replace — for nothing. The central banks will have acquired the infrastructure of the future at the price of the past. And the entrepreneurs who built it will have nothing to show but the satisfaction of knowing that, at least, the technology worked.

Mastercard Initiative: https://www.mastercard.com/global/en/news-and-trends/stories/2026/mastercard-crypto-partner-program.html

© The Times of Israel (Blogs)