In less than three months, El Salvador intends to become the first country in the world to make bitcoin its official currency alongside the US dollar.
The country’s president, Nayib Bukele, a populist and a savvy media disruptor, said his move will create jobs, enable the financial inclusion of tens of thousands of the country’s citizens who operate outside the formal economy, and will allow its large diaspora in the United States and elsewhere to send money to their families cheaply. The idea is that the government will guarantee convertibility into dollars at the time of the transaction through a trust fund of 150 million dollars created with the country’s development bank, BANDESAL.
Others are far from knowing how it will work.
The IMF (International Monetary Fund) says it needs to assess the legal, financial, macroeconomic and regulatory issues that may arise in connection with the $ 1 billion loan it is considering, and the World Bank has expressed reluctance to help. implementation, given the “environmental and transparency drawbacks” of Bitcoin. It is also unclear how the country will handle the risks inherent in its volatility: Bitcoin peaked in March at 58,734 per US dollar before falling back to around 39,091 this month.
Paradoxically, El Salvador is taking this unexplored path just as regulatory authorities around the world explore how they can manage the risks posed by cryptocurrencies.
In recent days, the Basel Committee on Banking Supervision, the world’s leading standard-setter for central bank regulation, has said it is consulting on a proposal that would see digital currency assets placed in two managed groups. differently. Cryptocurrencies, such as bitcoin, he said, will be subject to “new conservative prudential treatment” while others will be eligible for treatment under the existing Basel framework for banks.
The announcement follows an unrelated decision last month by the Chinese State Council’s Financial Stability Committee that said it would “clamp down on bitcoin mining and trading behavior.” Subsequent comments in Chinese state media made it clear that its financial institutions should not participate in or facilitate cryptocurrency transactions and criticized the excessive use of energy for Bitcoin mining. Although not stated, these developments may be related to the work that the country’s central bank is undertaking on creating a digital currency and electronic payment system for a digital Yuan that could eventually be promoted as the currency of the country. world reserve.
Another indirect blow was dealt when the US Department of Justice challenged the assumption that cryptocurrencies are secure. Using blockchain analysis, he seized 63.7 bitcoins worth US $ 2.3 million, paid by Colonial Pipeline to ransomware hackers by undisclosed obtaining the private key needed to access money.
These developments affecting the future of unregulated cryptocurrencies suggest that the innovative, balanced and progressive approach taken towards digital currencies by Caribbean countries has real value.
It has long been evident that the Caribbean needs to modernize and speed up its creaky and largely conservative banking and payment systems in a way that encompasses unbanked and rural communities, bypassing the region’s fragmented geography, and helping citizens cope during pandemic and in the post-disaster recovery period.
The challenge has been how to do it in a way that promotes development in a multi-currency region, lowers the relatively high cost of transactions, remittances and currency exchanges, embraces tourism and sustains the growing pressure on banks and corporations to respond to complex international issues. anti-money laundering and terrorist financing requirements.
What now sets the Caribbean apart from those looking to use or promote cryptocurrencies is the development of what are known as central bank digital currencies or CBDCs. These provide an electronic record in the form of a digital token that represents in virtual form, fiat currency, issued and supported by a government or regional financial authority.
This year, the Bahamas and the Eastern Caribbean introduced two of these currencies.
The first was the Bahamas SandDollar, a CBDC issued by the Central Bank of the Bahamas, which can be used for transactions on cell phones. A few months later, the Eastern Caribbean Monetary Union (ECCU) launched a digital EC dollar pilot project known as D Cash. This involves Antigua, Grenada, Saint Kitts and Saint Lucia, which are developing a digital payment platform supported by the Eastern Caribbean Central Bank, which, after a 12-month evaluation, is expected to roll out the initiative in all eight countries. of the ECCU.
Other Caribbean countries are also exploring the use of digital CBBCs. These include Belize and Jamaica, which hope to have fully operational systems in place by 2022; Haiti, which intends to develop a pilot program; and Barbados, which has used a third-party âsyntheticâ CBDC since 2017, 101% backed by banknotes and coins, overseen by the country’s Central Bank and Financial Services Commission. However, this has not yet evolved into a CBDC issued by the Central Bank. Suriname has also explored a CBDC, and Cuba is considering the role of cryptocurrencies and CBDCs for the additional reason that their use can enable transactions that US sanctions have made difficult to undertake.
There is also potential interest elsewhere. Speaking recently at a virtual conference in the Cayman Islands, Caribbean economist Marla Dukharan suggested that as a world-class, entrepreneurial, progressive and forward-looking jurisdiction, it should explore technologies that help distinguish it from others.
More generally, Ms Dukharan, who also works with Bitt, the Barbados-based fintech company that has helped develop D Cash and other Caribbean digital currencies, says future initiatives must come from policymakers and those who have an interest in supporting socio-economic development since CBDCs are unlikely to interest the non-Indigenous banking sector in the region.
She believes government, private sector, and cross-border transactions for commerce and remittances can be made much more affordable and efficient. âPolicymakers have the potential to completely change the way business is done,â she stresses. âI am proud that the Caribbean is becoming the hotspot for digital currencies for the world’s central banks, supporting financial inclusion, compliance efficiency and less informality. These are important considerations, especially for the Caribbean.
She’s right. Digital currencies regulated by carefully guarded central banks could within a decade not only revolutionize financial transfers in the Caribbean, but do a lot to engage the unbanked, encourage intraregional trade, and even facilitate the reconceptualization of the single market and economy. of the Caribbean.
âDavid Jessop is a consultant to the Caribbean Council