Cryptocurrencies have gained momentum and attracted more interest in recent years, usually in response to the volatile price of bitcoin.
The potential for a decentralised and regulation-free currency with the ability to disrupt the traditional banking system has irked government regulators and central banks who control the monetary system.
This had led to much regulatory uncertainty around digital assets.
The other ongoing issue with cryptocurrencies is that they have not yet become a convenient way to make payments, not least because their value fluctuates widely.
But many aspects of the concept deserve more than rejecting them out of hand, which is why central banks have started to look at their own versions of digitised money.
These so-called central bank digital currencies (CBDCs) are not the same as decentralised cryptocurrencies, like bitcoin. Instead, they are a digital representation or virtual form of fiat currency and use blockchain technology in a centralised, controlled and regulated way.
These digital currencies are backed by a country’s fiat currency, typically at a ratio of 1:1, and are just another part of the central bank-controlled money supply, together with other forms of money like bills, coins, notes or bonds.
According to a study by the Bank for International Settlements, about 80 central banks worldwide are looking at developing their own digital currency. Some of the most advanced pilot projects can be found in the Caribbean.
The Bahamas introduced its project ‘Sand Dollar’ in October 2020. It enables low-value digital Bahamian dollar-based transactions with nothing more than a cellphone.
The Eastern Caribbean Central Bank (ECCB) launched a central bank digital currency pilot called DCash at the beginning of April in Antigua and Barbuda, Grenada, Saint Kitts and Nevis, and Saint Lucia. DCash is a minted digital version of the Eastern Caribbean dollar issued by the ECCB.
Like the sand dollar, DCash can be sent and received, and payments can be made using a mobile phone wallet app.
Further afield, most central banks in developed nations are working on their own versions of CBDCs.
The UK Treasury and the Bank of England have set up a joint task force to develop a CBDC, nicknamed ‘Britcoin’. And, last week, the G7 finance ministers and central bank governors committed to working together on CBDCs to develop an understanding of their wider public-policy implications.
In a joint communique, they said: “We note that any CBDCs, as a form of central bank money, could act as both a liquid, safe settlement asset and as an anchor for the payments system. Our objective is to ensure that CBDCs are grounded in long-standing public sector commitments to transparency, the rule of law and sound economic governance.”
A digital currency for Cayman?
Economist Marla Dukharan argues that the Cayman Islands should introduce its own digital currency.
Speaking at the Cayman Islands Digital Economy Conference (CYDEC) on 3 June, she said if Cayman envisions itself as a world-class jurisdiction for doing business that is entrepreneurial, progressive and forward-looking, it should be exploring technologies that help to distinguish it from the rest.
The economist is well known in Cayman for her macroeconomic analyses of the Caribbean, but also works for Bitt, the Barbados-based Fintech company that helped develop DCash.
Dukharan said a digital representation of the Cayman dollar would have many benefits.
Compared to electronic fund transfers and card payments, Fintech companies generally find it easier to develop new services and solutions on top of a digital currency. These solutions bypass many of the traditional intermediaries of the banking system.
As such, CBDCs can improve access to financial services by making it easier for new players to enter the market and reducing information asymmetries about creditors, she said.
New digital currency-based lending solutions, such as peer-to-peer lending or crowdfunding for instance, could give small- and medium-sized companies better access to financing. CBDCs might also enable merchants to offer financing and credit products.
In addition, e-money will make it easier for new payment technologies to emerge, allowing entrepreneurs to grow their sales through new channels. Digital currencies can make payments faster and more efficient and improve data collection which helps businesses grow, Dukharan argued.
During the recent lockdown, many businesses moved from bricks and mortar to ‘brick and click’ with new service models, such as kerbside pickup and delivery, or online grocery sales. These e-commerce sales increases were ‘sticky’, and remained even as lockdown measures were eased.
The economist said that, underpinned by a digital currency, the new types of services would flourish more freely.
This next evolution of cash could also lead to lower fees and simplify anti-money laundering and know-your-customer due diligence and compliance.
At the government level the digitisation of payments can help increase the number of public services that can be delivered completely online. It can improve efficiency in the deployment of public spending, increase collections of government revenue and lead to fiscal savings.
Estonia, a world leader in e-government, has shown how effective this can be. The country spends just 40 cents to collect 100 euros in taxes and a tax return can be filed online in mere minutes, Dukharan said.
However, one of the most obvious benefits of digital currencies is that they have the potential to make cross-border payments faster and much cheaper compared with remittances, which can attract fees as high as 13%.
Dukharan said the cost of wire transfers and the complexity of cross-border transactions are among the main reasons for the proliferation of digital currencies in the region, “because we have so many little islands and it’s so costly and risky to move physical cash around”.
The economist said Cayman cannot rely on its banking sector to deploy these new types of technologies. As all Cayman banks are foreign-owned, they can hardly be expected to support nation-building efforts, she said.
What are the risks?
Dukharan acknowledged that there are certain risks that need to be managed when introducing a digital currency.
First, there must be strong legal foundations to guarantee security, privacy and usability. New legislation is also needed to manage and control digital assets.
If people decided to hold large amounts of digital currencies, it could defund the banks and create distortions and inefficiencies in the financial system.
And a digital currency could mean a broader remit for the Cayman Islands Monetary Authority or other regulators.
All these factors have to be considered, Dukharan said, but potential risks could be mitigated through the appropriate design of the digital money.
Cayman, she said, has the right ecosystem with a strong institutional framework, an experienced financial sector and a wide use of cellphones and internet in the community.
The challenge is to overcome any digital divide that exists to make sure that a digital currency or any other national solution, like a digital ID, does not exclude any part of society.
This could, for instance, be achieved with digital currency solutions that are card-based but do not use a smartphone or a tablet, Dukharan said.