The imminent introduction of digital currency to the Jamaican financial landscape will be a game changer that will push the country forward and widen financial inclusion, say a leading local economist and technology expert.
They were responding to the Bank of Jamaica’s (BOJ) announcement that digital currency is projected to be introduced in early 2022, with a pilot being tested in the BOJ’s Fintech Regulatory Sandbox between now and December this year.
Digital currency is a monetary instrument that is primarily managed, stored or transferred electronically.
“The potential for disruption is great. What the Bank of Jamaica is trying to do is issue a digital currency that is not disruptive and in a way that still maintains the traditional role for commercial banks,” said Dr Damien King, an economist and executive director of the Caribbean Policy Research Institute (CPARI).
Explaining the advantages of digital currency, he said it reduces the cost of transactions, does not incur any storage cost, there is minimal risk and it is easy to transact.
“It is game changing for the economy, because now you will be able to do all these things that you weren’t able to do before. It will facilitate micro payments and payments to the unbanked. I will be able to buy a drink from the man selling on the corner with a mobile payment,” he explained.
In addition, he said digital currency will create efficiencies in the economy and reduce the huge cost of transactions. It will also address the issue of financial inclusion.
“One of the advantages of digital currency is that it allows persons who don’t have a bank account to take advantage of it, as it allows them to make mobile transactions,” he said.
Chevaughn Robinson, senior software developer at MC Systems, the technology company of The Jamaica National Group, said the central bank digital currency will minimize the eligibility requirements to participate in the financial system, thus enabling greater access and inclusion for the unbanked.
“The ability for the unbanked to become part of the formal financial system will be a bonus as they can gain access to savings, loans and credit facilities,” he said
Digital Currency Vs Mobile Money
Addressing the potential that the introduction of digital currency may suffer a similar fate to mobile money, which is yet to take off in Jamaica despite its introduction some years ago, Dr King surmises that the response to a central bank-issued digital currency may be different from a bank issuing mobile money.
“The situation is different because everybody will be on the same platform. Before everyone needed to sign up to a provider. Now anybody else who wants to issue a mobile wallet will issue it on the Bank of Jamaica’s underlying architecture, which gives you interoperability,” he said.
“So no matter who issues your mobile wallet you can make a payment to another wallet owner, so that helps you to achieve interoperability and scale,” he said.
Robinson was similarly optimistic. “For the first time in history, there will be an electronic money solution that is fully backed by the central bank, providing a unified and equitable solution across financial institutions that will be interconnected and interoperable with the existing financial system. This is a huge opportunity to address inefficiencies and gaps in the existing financial infrastructure in such a way that no previous mobile money solution could achieve independently of the central bank.”
Robinson, however, noted that there are certain critical criteria that need to be met to ensure the success of the system.
“Barriers to entry must be extremely low, like cash, allowing anyone to participate with minimal friction or documentation requirements. The system must be interconnected and with existing financial systems, that is point of sale (POS), online banking, E-commerce and ATM infrastructure,” he said.
The senior software developer further noted that the system should provide open and equitable access to foster innovation by small and medium-sized businesses. He said persons should also be able to get access to cash seamlessly when needed and to convert cash to digital currency on demand 24/7.
How will it work?
According to the BOJ, the central bank digital currency (CBDC) will not be a cost to consumers and will be a full complement to bank notes and coins issued by BOJ. Both CBDC and physical notes and coins will co-exist in the payment space. The CBDC will have the major aspects of money, as now obtains with bank notes and coins, with the only significant difference being that it is an alternative to cash to be used primarily for transactions. It will, however, similar to cash, be a store of face value, a medium of exchange, a single unit of account, and a standard of payment.
As legal tender, the BOJ said the CBDC can be exchanged on a one-to-one basis with physical cash. Households and businesses will be able to use CBDC to make payments and store value at no cost. Unlike cash, however, consumers will be able to make payments with CBDC anywhere, anytime, on any compatible device.
The central bank digital currency to be issued by BOJ will solely be for domestic use, and the BOJ informed that it will be using the hybrid model for issuing CBDC. The BOJ will therefore not only issue to commercial banks, but also to other deposit-taking institutions (DTIs) – building societies, merchant banks and authorised payment service providers (PSPs)- all licensed or authorised by BOJ. These entities will distribute CBDCs to the retail market.
In order to use CBDC, the BOJ notes that consumers will need to have a CBDC account, which will be different from a regular bank account and much easier and simpler to obtain, with streamlined and simplified Know Your Customer, also known as KYC, requirements. Although persons who already have bank accounts will be able to automatically obtain a CBDC account, authorised PSPs and DTI’s will be able to onboard unbanked customers. Customers will be able to transfer and convert funds seamlessly between regular and CBDC accounts.
In order to carry out CBDC transactions anywhere and at any time, consumers will be able to access, download and deploy a mobile wallet app on any smart phone, tablet or similar compatible device using the networks of both major telecom service providers. Customers will also be able to top-up their accounts with CBDC through all authorised agents or smart ABMs and do business using CBDC phone-to-phone with merchants.
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