More than talk needed for digital currency reality
Digital currency payments should be as easy as using cash, tapping with a card or scanning a mobile phone to encourage adoption and accessibility and be able to make payments 24/7/365.

The announcement of “no new taxes” received the loudest applause in Parliament on Tuesday; however, the most transformative and innovative policy announcement was the piloting of Jamaica's digital currency. This pilot was first scheduled for 2020, but must have been delayed because of the onset of the novel coronavirus pandemic. But, ironically, the crisis and associated lockdowns of the pandemic have also accelerated the need for digital currency.

The Bank for International Settlements (BIS) have indicated that in the last 12 months more than 60 countries have experimented with national digital currencies, up from 40 in 2019. This includes four Caricom countries — Jamaica, Haiti, Trinidad and Tobago, and on February 17, 2021 The Bahamas became the first regional Government to fully launch a national digital currency.

Jamaica and the other 60 or so countries that are experimenting with digital currency are embarking on what is called central bank digital currency (CBDC). Simply put, the Bank of Jamaica (BoJ) would start issuing digital money in addition to paper money and coins. This digital money would be backed by the BOJ, legal tender, and can be used for everyday transactions. It would be the digital equivalent of cash. This kind of CBDC is called general purpose or retail CBDC and offers a new option to the general public for holding money.

Codruta Boar, advisor, Innovation Hub, BIS, and Andreas Wehrli, visiting member of secretariat, Committee on Payments and Markets Infrastructure, BIS, explained that CBDC is different from cash, as it comes in a digital form, unlike physical coins and banknotes. CBDC is also different from existing forms of cashless payment instruments for consumers, such as credit transfers, direct debits, card payments, and e-money, as it represents a direct claim on the central bank, rather than a liability of a private financial institution.

Neither the Government nor the BOJ has indicated how Jamaica's system will work from the customer/user side. However, based on my research, the system will not be anonymous and require some form of identification. In the Chinese system (eCNY), users download to their cellular phone a digital wallet from the central bank, Peoples Bank of China (PBOC), which is linked to your bank account. A QR (quick response) code is generated, which is used to conduct transactions. To spend the money users can use the app to scan a retailer's QR code or produce their QR code that the retailer can scan. Jamaica is likely to take a similar approach.

It is important to contrast CBDC with cryptocurrency like Bitcoin and Ethereum. Cryptocurrency is not backed by any central bank, or any asset, and therefore could be considered a speculative investment, rather than real money.

The other big difference between CBDC and cryptocurrency is governance. CBDC has a central authority, a national central bank, that is used to ensure integrity and finality of transactions. Cryptocurrency is based on decentralised governance and requires consensus among network nodes to ensure validity.

Burkhard Balz, a member of the executive board of the Deutsche Bundesbank, at the American Council on Germany virtual event, held February 10, 2021, posited that the drivers of CBDC are, firstly, the rapid pace of digitisation, e-commerce and online services due to the pandemic. These developments are increasingly calling for a safe and efficient settlement asset which can be seamlessly integrated into almost any kind of business process. The second is really a consequence of the first. Balz argues that the use of cash is waning, and even in Germany the pandemic has boosted not only the use of credit and debit cards, but contactless payments in particular. These trends are also evidenced in parts of Jamaica. It remains to be seen whether the current trends will persist post-COVID-19.

In order for the BOJ to issue CBDC the BIS's list of characteristics that makes this type of currency a platform that aligns with the financial stability that govern international monetary institutions must be met. They include:

• Payments should be as easy as using cash, tapping with a card or scanning a mobile phone to encourage adoption and accessibility and be able to make payments 24/7/365.

• The currency must exchange at par with cash and should be usable in many of the same types of transactions as cash, including point of sale and person-to-person. This will include some ability to make offline transactions (possibly for limited periods and up to predetermined thresholds).

• Payments should be at very low or no cost to end users, who should also face minimal requirements for technological investment and instant or near-instant final settlement should be available to end users.

• The infrastructure should be extremely resistant to cyber-attacks and other threats. This should also include ensuring effective protection from counterfeiting.

• The system should be extremely resilient to operational failure and disruptions, natural disasters, electrical outages, and other issues. There should be some ability for end users to make offline payments if network connections are unavailable.

• The system should be able to process a very high number of transactions and be scalable to accommodate the potential for large future volumes.

• The system needs to offer sufficient interaction mechanisms with private sector digital payment systems and arrangements to allow easy flow of funds between systems.

This list indicates that the digital currency will be all inclusive and pervasive. It is important to note that a precondition for CBDC issuance is its design will not disintermediate commercial banks, nor lead to heightened volatility of banks funding sources.

The motivations for central banks to issue digital currency are varied and may be based on jurisdictions. Boar and Wehrli explain that financial stability and monetary policy have, over time, become more important motivations for CBDC work in emerging markets and developing economies. These motivations are, however, secondary to financial inclusion.

One of the main reasons Jamaica is going digital is to increase financial inclusion. There is a growing realisation of the transformative potential of financial inclusion to accelerate development gains. As a consequence, on March 29, 2017 the Government of Jamaica launched the National Financial Inclusion Strategy (NFIS), which aimed to improve the country's financial system by 2020. The goal of the NFIS is to create the conditions in which Jamaicans, particularly those who were previously underserved by the domestic financial system, are able to save safely and build up resilience against financial shocks, and firms are able to invest, grow and generate greater levels of wealth. While Jamaica's CBDC will help to improve financial inclusion, the fundamental problems that contribute to exclusion must also be addressed.

There are also challenges with the introduction of CBDC. Digital cash will leave a footprint; therefore, payment data will exist. The BIS suggests that a key national policy question will be deciding who can access which parts of the data and under what circumstances. Striking this balance between public privacy (especially as data protection legislation continues to evolve) and reducing illegal activity will require strong coordination with relevant domestic government agencies, among them tax authorities. CBDC will make it easier for governments to track financial transactions and therefore reduce tax evasion and money laundering.

The BIS highlights another challenge — counterfeiting and cyber risk. Cash has sophisticated anti-counterfeiting features and large-scale issues rarely occur. Theoretically, a successful cyber-attack on a digital CBDC system could quickly threaten a significant number of users and their confidence in the wider system (as it could for a large bank or payment service provider). Defending against cyber- attacks will be made more difficult as the number of endpoints in a general purpose CBDC system will be significantly larger than those of current wholesale central bank systems.

A recent New York Times article, referencing the digital Chinese yuan, or eCNY, indicated that CBDC will give the central banks new powers, including novel types of monetary policy to help grow the economy and to develop new tools to collect data and leverage so that the economy is more intelligent and based on real-time information. In one scenario that economists have discussed, the central bank could program its digital currency to slowly lose value so that consumers are encouraged to spend it immediately.

The Jamaica Government should seek to balance the motivation for this new policy with the risks involved and ensure that its actions support public policy objectives. This is a progressive move by the Government.

Professor Paul Golding is former dean of the College of Business and Management at the University of Technology, Jamaica. Send comments to the Jamaica Observer or pgolding@utech.edu.jm.

Paul Golding
Paul Golding

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