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.
President Nayib Bukele, a populist and media-savvy disruptor, says 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 empower 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 International Monetary Fund, the IMF, 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 assist with implementation given the “environmental and transparency drawbacks” of Bitcoin. It is also unclear how El Salvador will handle the risks inherent in the volatility of the cryptocurrency. Bitcoin’s value peaked in March at US $ 58,734 before falling back to around US $ 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 China’s State Council Financial Stability Committee, which said it would “clamp down on bitcoin mining and trading behavior.” Subsequent comments in Chinese state media made it clear that its financial institutions must 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 an 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; reduces the relatively high cost of transactions, remittances and monetary exchanges; embraces tourism and supports increasing pressure on banks and corporations to meet the complex international requirements of combating money laundering and terrorist financing.
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 DCash. This implies that Antigua, Grenada, Saint Kitts and Saint Lucia develop 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 CBDCs. 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 “synthetic” 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 DCash and other Caribbean digital currencies, says future initiatives must come from policymakers and those with a stake. interest in supporting socio-economic development as 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.
“Policymakers have the potential to completely change the way business is done,” she stresses. “I am proud that the Caribbean is emerging as the global hotspot for central bank digital currencies, supporting financial inclusion, compliance efficiency and less informality. These are important considerations, especially for the Caribbean.
She’s right. Carefully guarded central bank-regulated digital currencies could not only revolutionize financial transfers in the Caribbean, but do a lot to engage the unbanked, encourage intra-regional trade, and even facilitate the reconceptualization of the unique market and economy of the Caribbean. the Caricom.