Central bank warns crypto cannot shield Israel from sanctions as former officials and economists predict investor flight, financial instability and deeper economic isolation.

The Bank of Israel on Saturday rejected Prime Minister Benjamin Netanyahu’s proposal to use cryptocurrency to circumvent potential international sanctions, urging the government to focus on preventing restrictions and preserving trade ties.

“Cryptocurrencies cannot serve as a means of circumventing sanctions,” the central bank said in a rare public rebuke.

“The right course for Israel’s economy is to maintain its economic relationships with our main trading partners and focus on preventing sanctions and their negative impact on the economy,” the bank said. “This issue falls within the responsibility of the political leadership, and it should take action to advance that goal.”

Netanyahu proposed developing an alternative financial system in an interview with Israel’s Economy Channel, suggesting cryptocurrency and blockchain could help Israel operate under potential banking sanctions. He said he had ordered a plan to be prepared, but officials at the Finance Ministry and Prime Minister’s Office said they knew of no such initiative.

Speaking to Channel 14, Netanyahu stood by his position: “I hear the objections and take them into account. I thank the Bank of Israel for its advice. I listen, but I do what I think is right.”

Yair Avidan, a former Bank of Israel banking supervisor, said the proposal misunderstood how sanctions operate.

“Blockchain is not a solution for circumventing sanctions,” Avidan said. “Moving a transaction onto a blockchain network or using a digital token does not make sanctions disappear, does not create an alternative economy, does not override legal prohibitions and does not change the obligations of the parties involved.”

Banks, payment providers and trading partners must still comply with financial regulations, he explained. While blockchain may help maintain payment systems during emergencies, it cannot replace international financial networks.

“The threat of sanctions is real,” Avidan said, warning that restrictions could disrupt banking, trade, credit and investment, raising costs for Israelis. He urged the government to protect international trust and commercial relationships.

Former Finance Ministry director-general Yarom Ariav warned that Netanyahu’s remarks could unsettle markets, threaten Israel’s credit rating and accelerate capital flight.

“Sanctions are not an inevitable force of nature. They are the direct result of failed policies,” Ariav said.

He cautioned that pursuing financial workarounds could associate Israel with isolated regimes such as Iran, while prompting foreign investors and skilled workers to look elsewhere.

Professor Yair Zimon warned that a crypto-based alternative could threaten Israel’s access to international banking, foreign investment and trade. He said replacing established networks such as SWIFT with volatile, insufficiently regulated digital currencies could weaken the shekel, fuel inflation, drive technology companies abroad and disrupt imports of essential goods, energy and medicine.

“Turning Israel’s stable financial system into one based on volatile, unregulated currencies would be tantamount to gambling with the fate of the entire economy,” he said.

Even cryptocurrency industry representatives rejected the idea that digital assets could bypass restrictions. Tomer Sharoni, CEO of Adresable, a cryptocurrency intelligence company, said transactions remain traceable.

“Changing the means of payment does not turn a prohibited transaction into a permitted one,” Sharoni said.

He added that digital payments cannot guarantee foreign businesses will continue trading with Israel or investing in its economy. Cryptocurrency, he argued, should strengthen international integration rather than provide an escape from global financial rules.

Professor Manuel Trajtenberg, former chairman of Israel’s National Economic Council, said international isolation was not inevitable and linked Netanyahu’s crypto proposal to his earlier vision of a self-reliant “Sparta.” Neither, Trajtenberg warned, offered a genuine solution to Israel’s economic challenges.

The Israeli High-Tech Headquarters warned that isolation could devastate an industry dependent on foreign investment and open markets, forcing companies to close or relocate overseas. Former minister Professor Shimon Shetreet cautioned that sanctions against Israeli banks could spread across industries, while Tel Aviv University economist Professor Eran Yashiv warned that Netanyahu’s comments could intensify market concerns and potentially increase the risk of sanctions.

The central bank’s message was clear: cryptocurrency has legitimate uses, but it cannot replace Israel’s international financial relationships. The government, officials and economists argue, should focus on preventing sanctions and preserving the trade and investment ties that underpin the economy.