Issue 4, September 2020 Island economies The unique use case of CBDC in small island economies JOURNAL 2 DMI JOURNAL_SEPTEMBER 2020 JOURNAL Issue 4 September 2020 3 4 6 9 Island News Agents of change Fiji’s financial 30 Crown Place, London, experiments or novelty acts? system catching up EC2A 4EB United Kingdom CONTENTS T: +44 (0)20 3008 5262 to innovation F: +44 (0)20 7965 4489 Including: European Central omfif.org/dmi @OMFIF By John Orchard Bank, Banco Central do Brasil By Philip Middleton By Esala Masitabua and Mastercard Philip Middleton, Chairman, DMI John Orchard, Chief Executive Officer, OMFIF 10 11 12 14 16 Bhavin Patel, Editor, DMI Julia Demidova, Commercial Monetary thinking Big gains for small In conversation Three real-world Building bridges Director, DMI and regulatory economies with Lotte Schou- lessons from in the era Katie-Ann Wilson, Head, DMI Programming tinkering Zibell the Bahamas of fintech Julie Levy-Abegnoli, Subeditor By Ryan Peterson By Julia Demidova By Bhavin Patel By John Kim By Christos William Coningsby-Brown, and Vinay Mohan Efthymiopoulos Assistant Production Editor and Moad Fahmi Strictly no photocopying is permitted. It is illegal to reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the content of this publication without the prior consent of the publisher. While every care is taken to provide accurate information, the publisher cannot accept liability for any errors or omissions. No responsibility will be 17 18 19 20 21 accepted for any loss occurred by any individual acting or not acting as a result of any content in this publication. A digital asset Marshall Islands goes Mauritius prepares Taking tech to the Purses went out of On any specific matter reference should be made to an appropriate adviser. ecosystem global with national for the introduction next level style for a reason Company Number: 7032533. in the making digital currency of CBDC ISSN: 2398-4236 By Andrew Schofield By Pietro Grassano By Tilotma Gobin Jhurry By Dmitry Tokarev By Dan Conner and Petri Basson and Aswin Ramduny OMFIF.ORG/DMI LEADER 3 Island experiments Small island nations are experimenting with digital currency and helping solve Contactless- problems highlighted by the DMI, as well as other ones, writes John Orchard, chief paying consumers executive officer of OMFIF. are pleased their phones are so A CLEAR set of recurring themes has emerged through the often unbanked recipients, and potentially even programme what DMI’s meetings and publications so far: how can – and should it can be spent on. You will find financial inclusion at the heart of convenient and – the anonymity of cash be preserved? Which technologies will the island experiments showcased here. less worried about facilitate central bank digital currency? Will the commercial CBDC will require not just technical but also regulatory banking sector be disintermediated, or inadvertently defunded? innovation. The DMI’s recent discussion on the implications for whether Google How will the payments infrastructure link between those two commercial banks of digital cash found itself momentarily tangled Pay or their bank sectors and other payment providers, or even between competing in the distinction between banks, payments systems and tech systems and jurisdictions? What broader impact might CBDC companies. They are theoretically quite distinct, and regulated is the principal have on its currency of issue? These hotly discussed and well- as such, but are beginning to blur in practice. Contactless-paying conduit for the recognised issues remain unsolved for now, though as our last consumers are pleased their phones are so convenient and less edition explained, the People’s Bank of China, among the major worried about whether Google Pay or their bank is the principal transaction. central banks, seems furthest ahead. conduit for the transaction. Small and nimble states are at liberty In our first edition, Philip Middleton wondered whether the to explore how to regulate these evolving interlinkages, as the person in the street would notice or care that CBDC had been Cayman Islands’ virtual asset service provider law described on introduced. Our look at island economy initiatives in this edition p.17 demonstrates. takes us back to that key first principle: how is CBDC useful Bringing all of these elements together is the striking for people and society? As Julia Demidova points out, many innovation in CBDC in the Bahamas, Project Sand Dollar, small island economies lack payment infrastructure and have described on p.14, which is on the way to solving those challenges relatively poor financial inclusion. Digital cash can leapfrog this raised over and again in our sessions, and even contending gap and piggyback on the proliferation of smart phones. Esala with one that is not: how to operate in a digital format when Masitabua, deputy governor of the Reserve Bank of Fiji, remarks the physical networks are especially vulnerable to interruption. that mobile connectivity is as densely distributed there as in If tech firms, banks, regulators and people want to see how developed economies. Middleton notes, in our cover story, that CBDC might work for them, this project is a good place to start. CBDC infrastructure, complete with appropriate controls and data Geography may sometimes make life difficult for these small collection, represents a good and – for now – fraud-resistant way states, but it is propelling them to the front of the next money for governments to disburse welfare directly to its intended and revolution. 4 NEWS DMI JOURNAL_SEPTEMBER 2020 Lagarde makes case Brazil could have CBDC in two years Roberto Campos Neto, president of Banco Central for digital euro do Brasil, told Brazilians they could expect to have In a speech at the Bundesbank conference on a CBDC before 2023. He said that the country’s banking and payments, European Central Bank central bank had already undertaken measures to President Christine Lagarde suggested that euro modernise the Brazilian financial system, making a area central banks are close to deciding whether digital currency the natural outcome. to press ahead with the development of a CBDC. She said that the European Union cannot afford to be left behind in the development of digital Reserve Bank of payment methods, reasoning that the ‘transition to a Australia sceptical digital new normal’ is necessary to provide greater competition in payments. over CBDC The Reserve Bank of Australia’s latest payments paper outlines Nationwide launch of sand dollar a cautious and sceptical line imminent toward central bank digital currency. The RBA believes The Central Bank of The Bahamas has just $48,000 there is not a strong policy case worth of sand dollars on its balance sheet, pegged for issuing a CBDC in Australia, one-to-one with the domestic Bahamian dollar, which pointing to the success of the itself is fixed to the dollar. Despite the small scale, the country’s efficient, real-time new project puts the country at the forefront of the global payments platform. race to create a state-backed digital currency. OMFIF.ORG/DMI NEWS 5 Andrew Bailey calls for FURTHER READING A collection of research, reports and white papers from stablecoin regulations central banks and the industry over recent months, showing how the narrative is evolving in the payments sector. These documents outline current views on designs Bank of England Governor Andrew and experiments in digital currencies, as well as the concerns and challenges that lie ahead. Bailey has warned that regulators around the world must move early to set Retail Central Bank Digital Currency: Design Considerations, Rationales and Implications standards that reduce risks and foster Reserve Bank of Australia, September innovation, given how quickly digital https://bit.ly/32Pef2w Lessons learned from the world’s first CBDC currency experiments are progressing. Bank of Finland, August https://bit.ly/33JwOo0 Bailey emphasised that if stablecoins Rise of the central bank digital currencies: Drivers, approaches are to be widely used as a means of and technologies Bank for International Settlements, August payment, ‘they must have equivalent https://bit.ly/2RKeXaN Payments in a digital world standards to those that are in place Speech: Christine Lagarde, President of the ECB, September today for other forms of payment types https://bit.ly/2RJCpVN Reinventing the wheel (with more automation) and the forms of money transferred Speech: Andrew Bailey, Governor of the Bank of England, September through them’. https://bit.ly/3mGwZZS Mastercard launches CBDC testing platform Mastercard is looking to support central banks in their pursuit of CBDC with its new platform. This promises to enable the simulation of issuance, distribution, and exchange of CBDC between banks, financial service providers and consumers. The company intends to invite central banks, as well as commercial banks and tech and advisory firms, to assess CBDC designs, validate use cases and evaluate interoperability with existing payment rails. 6 CBDCs DMI JOURNAL_SEPTEMBER 2020 Agents of change or novelty acts? Many small island economies are experimenting with digital currency, but implementation presents myriad challenges, writes Philip Middleton, DMI chairman. OMFIF.ORG/DMI 7 WHO, OVER THE past febrile months, has not longed to be on an island, be it the It is striking that rugged magnificence of Iceland, the spectacular reefs of Fiji, the idyllic cays of the Bahamas, or the arduous trails of New Zealand? I have currency notes from each of there is a range of them, although I wonder for how much longer. Many of the world’s island states are policy imperatives exploring electronic money, stablecoins and central bank digital currency, and in driving these this edition of the Journal we seek to give you a flavour of the varied and interesting experiments, and projects underway. while there are Strictly speaking, Australia and Great Britain are island states, but our focus here is on islands that are geographically smaller and economically less mainstream.