Despite the relatively widespread adoption of mobile and internet technology in the Caribbean, retail payments[i] are characterised by “high costs and insufficient access for large swathes of the region’s population (BIS (2020)).” The lack of access to a regular bank account or to other services of financial institutions through mobile devices adversely impacts people from saving, accessing credits or insurance in a manner that could reduce poverty and inequality, drive economic growth, and empower individuals. To overcome these limitations, several small open economies in the Caribbean region have shown keen interest in central bank digital currencies, or CBDCs.
The purpose of this blog is to look at the motivation for CBDC in the Caribbean Region by considering specifically the Central Bank of the Bahamas’ Sand Dollar, the Eastern Caribbean Central Bank’s DCash, and the Bank of Jamaica’s Jam-Dex. Central banks in the Caribbean have been amongst the first to introduce a CBDC. For that reason, their experience is worth watching and analysing in order to draw valuable lessons for other jurisdictions (and even currency unions) that are thinking about doing so.
The Central Bank of the Bahamas’ Sand Dollar
In October 2020, the Central Bank of The Bahamas announced that its CBDC, called the ’Sand Dollar‘, became available to all 393,000 residents of the Bahamas. This makes the Bahamas the first country in the world to officially roll out a CBDC. Each Sand Dollar is equivalent to one Bahamian dollar, which in turn is pegged to the US dollar. In 2019, it started a pilot program using 48,000 digital Sand Dollars on the islands of Exuma and Abaco, which have a combined population of fewer than 25,000 people.
As noted in my Suara SEACEN’s Blog post The Rise in Interest in CBDC, one of the key motivations for the Sand Dollar is to promote financial inclusion and access within the archipelago nation of more than 700 islands, about 30 of which are inhabited. The issue of financial inclusion is somewhat a paradox as the country’s high per capita income and well-developed banking industry tends to mask the level of uneven access to financial services. But, John Rolle, Governor of the Central Bank of The Bahamas, speaking at a workshop by the Alliance for Financial Inclusion (AFI), noted that the commercial bank withdrawal from the sparsely-populated Family Islands and the continued pressure on correspondent banking relationships were two threats to local access to financial services. The rising costs of providing banking through traditional physical channels have further scaled-back this access. Also, high concentrations of undocumented immigrants are excluded entirely from access to financial services, even when these services are available in the same spaces for documented persons. The central bank has also reported that pockets of the population are excluded either because of remoteness or because of more stringent know-your-customer (KYC) requirements.
The Eastern Caribbean Central Bank’s (ECCB’s) DCash
In March 2021, the Eastern Caribbean Central Bank (ECCB) launched the first retail central bank digital currency (CBDC) within a currency union, that is the Eastern Caribbean Currency Union (ECCU). The ECCB is the central bank for the Eastern Caribbean dollar and is the monetary authority for the members of the Organisation of Eastern Caribbean States (OECS)[ii]. Amongst its core mandates are price and financial sector stability in the ECCU. It was founded in October 1983 with the goal of maintaining the stability and integrity of the subregion’s currency and banking system in order to facilitate the balanced growth and development of its member states.
Initially, DCash – the digital version of the Eastern Caribbean (EC) dollar – was launched in four of the eight-member ECCU countries, namely Antigua and Barbuda, Grenada, Saint Christopher (St Kitts) and Nevis, and Saint Lucia, then in August 2021 in Saint Vincent and the Grenadines, and in December 2021 in the Commonwealth of Dominica and Montserrat. The remaining member country where DCash will be launched is Anguilla.
The ECCB describes blockchain-based ‘DCash’ as a digital version of its EC dollar that offers a ‘safer, faster and cheaper’ way to pay for goods and services, and send funds to other DCash users, using a smart device. The ECCB sees the digital currency’s introduction as helping to increase financial inclusion, competitiveness and resilience across the islands’ economies. Part of the motivation to launch the CBDC is also an aspiration to cut the use of traditional notes and coins by 50 per cent by 2025. Governor of the ECCB Timothy N. J. Antoine described the rollout of DCash as a “critical first step in the grand project of building out a digital economy” in the ECCU.
Citizens and merchants can sign up to use DCash through participating financial institutions or by downloading an app from the Google Play or Apple Store. Unbanked citizens will need to meet ID verification compliance requirements at participating non-bank financial institutions. DCash is designed to have an e-commerce functionality andto be interoperable with other ‘present and future’ digital currencies.
In February 2022, a Bloomberg article reported that DCash had been offline for more than a month, and according to ECCB’s bank official it could take several more days to fully restore service. Previously, on January 14 the ECCB advised that the DCash platform had experienced an interruption in service that affected all users but did not compromise data. The bank noted that the break in service had been caused by a technical issue and the subsequent necessity for additional upgrades. During the disruption, DCash transactions were unable to be processed.
The ECCB noted that service interruption had impacted all of its DCash partners. The bank highlighted that it was actively and diligently working with its service provider, technical partner, and specialists to bring the platform back online. Furthermore, a report was made and logged of all failed transactions, and the bank committed that these transactions would be honoured once full DCash service is restored. It assured the public that while DCash service was interrupted, all DCash wallet balances remained secure and unaffected.
On Wednesday, March 9, 2022, the ECCB announced that full functionality of the DCash digital payments platform has been restored. As part of the restoration, the platform now benefits from several upgrades including an enhanced certificate management process and an updated version of the software which provides the foundation for the DCash system. Extensive testing and assurance exercises were conducted prior to restoration of the platform to ensure full functionality of the service in accordance with quality assurance specifications. The ECCB is continuously monitoring the system’s performance to optimise the user experience and increase user engagement.
Bank of Jamaica’s Jam-Dex
According to a Reuters’ article, in January 2022, the Bank of Jamaica (BOJ) announced that it will roll out its digital currency across the country. Jamaica Digital Exchange (Jam-Dex) is part of an effort to lower transaction costs and provide financial services to citizens who do not use banks. In December, the BOJ said that it completed a pilot project that issued 230 million Jamaican dollars (JMD, equivalent to USD1.5 million) of the new currency.
In an interview with Reuters, Natalie Haynes, Deputy Governor, banking and currency operations and financial markets infrastructure with BOJ said ”The majority of Jamaicans are financially excluded. To get those persons into the formal financial system, we decided that the central bank digital currency would be a good opportunity.” She also noted that the bank hopes to replace 5 per cent of Jamaican dollars with the new digital currency each year. Five million Jamaican dollars (USD38,000) was issued to National Commercial Bank (NCB) of Jamaica, one of the islands major commercial banks, and JMD1 million (USD6,000) to Bank of Jamaica employees. The Bank of Jamaica said NCB signed up 57 customers to use the new currency. John-Matthew Sinclair, chief product officer for TFOB (2021) Limited[iii], an NCB subsidiary, noted ”It’s a different way to pay and allows for easy peer-to-peer transactions.” Customers sign up for a digital wallet, where they can deposit funds in exchange for digital currency that can then be used in transactions.
In February 2022, Jamaican Prime Minister Andrew Holness used Twitter to confirm that the country will launch the “digital Jamaican dollar.” As noted above, the BOJ conducted a successful CBDC pilot project in 2021 and will join the Central Bank of The Bahamas and the Eastern Caribbean Central Bank in the Caribbean region. Holness tweeted on February 11, 2022, that the Bank of Jamaica will roll out the CBDC, while also mentioning some of the benefits he expected to gain from such a move – “greater financial inclusion, lower cost of banking, and a foundation for Jamaica’s digital payments architecture.”
Financial inclusion in the Caribbean
Based on the Global Findex Report (2017), financial inclusion in the Caribbean is developing at a lower rate than other parts of the world. The report indicates for the Caribbean:
- 58 per cent of adults have a financial institution
- Women are still 6 per cent less likely to have their own bank account than men, 3 per cent less than the global average
- Despite the fact that there is still a great percentage of unbanked individuals, more than 50 per cent of adults have mobile phones and Internet access, 15 per cent higher than the average of developing countries in the world, key factors to expanding financial inclusion
- Financial inequality has not improved in the last few years: individuals living in the wealthiest 60 per cent of households are 13 per cent more likely to have a bank account than those living in the poorest 40 per cent of households
The geography of some of the islands in the Caribbean makes some parts extremely difficult for financial service providers to reach through traditional banking models, and banking branches are not at all cost-effective, particularly in rural areas. In the latter, the low percentage of banked population is due mainly to a high level of mistrust of the banking system, financial illiteracy and high costs.
Retail payments in the Caribbean
Despite the widespread adoption of mobile and internet technology, payment innovation in the Caribbean region has not kept pace with other parts of the world. According to the Global Findex Report (2017), 58 per cent of the population in these countries have access to mobile phones, making them ideal candidates for mobile financial services and simple value chains. But, relative to other regions, retail payment services involve high costs for end users and generally are subpar efficiency, partly reflecting low competition among financial institutions and limited compatibility among different payment solutions. Along with low-income levels, high informality and low financial literacy, high costs contribute to limiting the access to electronic and digital payments for large swathes of the region’s population (BIS (2020)).
One of the main shortcomings affecting retail payments in the Caribbean relates to interoperability and competition. Interoperability is the technical or legal compatibility that enables a payment system or mechanism to be used in conjunction with other systems or mechanisms. It allows participants in different systems to conduct, clear and settle payments or financial transactions across those systems. In particular, interoperability does not require users and providers to participate in multiple systems (CPMI (2016a)). Limited or low levels of interoperability and low competition drive high user costs.
In the Caribbean, interoperability might be much more limited than in other regions. The implications of limited or lower levels of interoperability normally translate into higher costs to process a transaction and a longer time for the funds to reach the payee. Additionally, weak interoperability may limit competition among payment service providers (PSPs), mostly banks, thus helping keep high margins on the transactions they process. Consequently, net interest margins – a proxy for competition in the banking sector – tend to be higher in countries with no requirements for interoperability, highlighting the link between interoperability and competition in payment services.
Another fact affecting retail payments is the relatively low level of access to digital payments. As the world has transitioned to digital payments, access to digital payment services in the Caribbean has lags other regions. As noted earlier, approximately 45 per cent of adults are currently making and receiving digital payments. But in recent years, digital payment has grown exponentially in some countries of the Caribbean. The relatively low level of access to digital payments implies that there is a heavy reliance on the use of cash relative to electronic or digital forms of payments.
Several factors may explain the relatively low level of access to digital payments. One is the lower level of per capita income relative to other regions, which is also typically associated with poorer internet, mobile and electricity infrastructure. A second factor is the larger shadow economy, which makes traceable payments less attractive. A third factor is the lower degree of competition in the banking and payments space, for which high net interest margins are a proxy, which drives up costs of payments for users. Finally, a low level of financial literacy also plays a role, as less informed potential users may perceive alternatives to cash as unsafe, unreliable or too complicated.
CBDC is not a panacea for financial inclusion
Financial inclusion is a primary driver for the thrust towards CBDCs in the Caribbean. But, as noted in the Suara SEACEN blog post Central Bank Digital Currencies and Financial Inclusion by Ole Rummel, a general purpose CBDC could enhance financial inclusion only to the extent that inclusion features prominently in its design from the outset.
The emerging CBDCs designs architecture in the Caribbean retains some aspects of the current two-tier banking system. This is not surprising given that that there is more or less consensus that the two-tier system, similar to the current financial system architecture, is the preferred choice rather than the single tier system envisaged under a direct CBDC. Under the current two-tier banking model, central banks are issuers and commercial banks are administrators and are regulated accordingly. On the negative side, that adds a certain level of complexity for both bankers and consumers that would not be present in a single banking system. For example, regulation is considered one factor that might explain variation in financial inclusion.
While the direct CBDC models appear to hold the greatest reward in terms of financial inclusion it also poses significant risk to financial stability. In the direct CBDC model individuals and businesses hold CBDCs through private accounts at a central bank. The central bank handles all payments in real time and thus keeps a record of all retail holdings. Intermediaries are no longer necessary, as the central bank takes over the role of onboarding and handling all payment services. In this scenario, the diminished role of intermediaries is likely to materially affect the structure of the current financial system and substantially increase the roles and responsibilities of central banks. But, based on different studies and proofs of concept of central banks, this scenario is not the preferred option. It is therefore no surprise that central banks in the Caribbean opted for retaining aspects of the two-tier banking model. By ruling out the direct CBDC model, however, they have made the decision on the extent of the likely impact on financial inclusion that the introduction of a CBDC will have on local economies. Therefore, there is clearly a policy trade-off is between financial inclusion and financial stability in the design of CBDCs.
A hybrid CBDC architecture incorporates a two-tier structure with direct claims on the central bank, while real-time payments are handled by intermediaries. But the central bank periodically updates and retains a copy of all retail CBDC holdings. By contrast, an intermediated CBDC architecture runs a wholesale ledger. In this architecture, PSPs would need to be closely supervised to ensure at all times that the wholesale holdings they communicate to the central bank indeed add up to the sum of all retail accounts.
The intermediated CBDC model may not yield much in terms of enhancing financial inclusion because it is unlikely that the provision of digital wallets and onboarding of consumers by intermediaries will be free. Those services would include customer service, dispute resolution, AML/CFT compliance (including both on-boarding and transaction monitoring), fixed and variable technology expense, and more. The costs for these services will likely be passed on to consumers, and as such could become a hindrance for financial inclusion just as they are today.
But even if account administration were somehow, magically, free, how would an intermediated CBDC attract the unbanked? BIS (2021) noted that in emerging markets and developing economies (EMDEs) people may be reluctant to join the banking system because they distrust banks and governments. There is also a concern about privacy as to the source of their funds. Other possibilities are a lack of sophistication about finance due to financial illiteracy. Under an intermediated CBDC model, this same group of people would be required to establish an account at a bank or other financial company (including going through a full KYC process as required under anti-money laundering, countering the financing of terrorism (AML/CFT) and sanctions rules), upload a digital wallet to a phone or computer, and then have their transactions monitored by the bank and perhaps by the government as well.
The question is why would people who are reluctant to sign up for a bank account want to have a wallet for CBDC at a bank? Central banks are the ultimate source of trust in money and payments and therefore play a key role in maintaining the safety and integrity of payment systems as well as ensuring that private sector innovation is channelled towards improving competition, consumer protection and financial inclusion, and preserving financial stability (BIS (2020)).
One of the keys to financial inclusion is providing no-frills bank accounts. In India, the Government has done a very helpful thing by providing a payments infrastructure on top of which private payment providers can innovate to provide efficient services. Started in 2014, the Pradhan Mantri Jan Dhan Yojana (PMJDY) provides no-frills bank accounts without charge, using the country’s universal Aadhar biometric personal identification to lower costs. To date, over 420 million people have been brought into the system, with account balances averaging nearly USD50. Again, India’s success required subsidies, not the issuance of CBDC (Cecchetti and Schoenholtz (2017)).
Another issue with the intermediated CBDC is that the risk of a cyberattack would be massive, and the intermediator, not the central bank, would likely be liable for any loss. So, intermediating a CBDC could be a very expensive and very risky proposition, and it is likely the cost will be passed on the consumers.
As we noted earlier, DCash in the Eastern Caribbean has experienced a blackout. According to Josh Lipsky, the Director of the Atlantic Council’s GeoEconomics Center, this is an important case study in things that can go wrong in the rollout and expansion of a digital currency. This will likely be the experience for every country trying do a large rollout of a central bank digital currency. In the case of DCash, Bloomberg reported that Karina Johnson, a DCash project manager at the bank, noted that the technical problem with the digital currency related to an expiring certificate on the version of the Hyperledger Fabric that hosts the DCash ledger. This apparently forced the ECCB to roll out updates. Interestingly, the project manager also noted that the bank was approaching the end of closed testing on the technical solution and anticipated commencing wider stakeholder testing.
The lingering DCash outage was not expected to be particularly disruptive to business, given that the e-currency still represents a “minimal” amount of total sales. This is according to Geo. F. Huggins & Co., a Grenada-based conglomerate, which was the first company to accept a DCash payment a year ago — before the official launch and at the height of the global pandemic. Huggins’ Corporate Marketing Manager Najuma Francis-Patrick noted that the COVID crisis and the ensuing lockdowns stymied the DCash education campaigns across the island and at the company’s grocery stores. But she has high hopes for the e-currency system that allows anyone with a mobile phone to shop and pay bills, noting “As we start to emerge from COVID, we think that DCash will become one of the preferred payment options in the near future.”
Central banks in the Caribbean have been amongst the first to introduce a CBDC. For that reason, their experience is worth watching and analysing in order to draw valuable lessons for other jurisdictions (and even currency unions) that are thinking about doing so.
Despite the widespread adoption of mobile and internet technology, payment innovations in the Caribbean region have not kept pace with other parts of the world. One of the main shortcomings affecting retail payments in the Caribbean relates to interoperability and competition, and this situation adversely impacts access and financial inclusion. Consequently, to overcome these limitations, the main motivation for CBDCs in the Caribbean appears to be enhancing financial inclusion. Efforts to improve payment services have received further impetus from the COVID-19 outbreak.
The two-tier architecture design appears preferable to the direct model. In the Bahamas, the Eastern Caribbean and Jamaica, the design architecture seems to be supported by a digital platform that allows private payments providers to also participate, on an equal basis, with good data governance and interoperability between different payments arrangements. This, it is hoped, will spur competition, improve convenience, reduce costs for users, and support further financial innovation. But CBDC could enhance financial inclusion only to the extent that inclusion features prominently in its design from the outset.
DCash: motivations, challenges, and lessons from the first monetary union CBDC pilot, Central Banking, August 24, 2021
Beck ,Thorsten and Henry Mooney “What can Caribbean countries do to accelerate financial development?” March 19, 2021 based on a chapter in Economic Institutions for a Resilient Caribbean—entitled: Financial Development in the Caribbean, Inter-American Development Bank (IADB)
Baer, Greg and Paige Pidano Paridon “The Waning Case for a Dollar CBDC”, The Bank Policy Institute (BPI), February 18, 2022
[i] They handle a large volume of low-value individual payments transactions between consumers, businesses and public authorities. They can be everyday consumer transactions, but also include, for example, salary and tax payments made by businesses. Some of the most common means of payment are payment cards, credit transfers, direct debits and cash. While some payment instruments still require the physical handling of paper, e.g., cheques, paper-based credit transfers, an increasing number of payments can be done electronically using payment cards, online/mobile banking, etc. Retail payment systems may be operated either by the private sector or the public sector.
[ii] OECS currently has eleven members which together form a continuous archipelago across the Leeward Islands and Windward Islands. Anguilla, the British Virgin Islands, Guadeloupe and Martinique are only associate members of OECS.
[iii] TFOB is an acronym which stands for ‘the future of business’.