Jamaica’s central bank digital currency and the problems it hopes to solve

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The Central Bank of Jamacia recently announced that it will launch its central bank digital currency (CBDC), dubbed the Jamaican Digital Exchange, or Jam-Dex, in the first quarter of 2022. According to the Jamaican government, the national digital currency will help reduce transaction costs while enabling the unbanked to access financial services.

It is estimated that more than 17% of Jamaicans are unbanked, but it is feared that many more are underbanked. This is largely due to systemic obstacles in the financial sector. High transaction costs, in particular, are a huge limitation. Therefore, many Jamaicans believe that banks are the preserve of the wealthy.

That said, Jamaica’s internet penetration boasts an impressive over 55%, while mobile phone usage is at 100%. The Jamaican government is banking on these positive technological dynamics to catalyze the adoption of its national digital currency.

As things stand, the Jamaican banking sector is highly centralized. Two banks dominate more than 60% of the entire banking sector in the country. The situation brought healthy competition and aggravated retrograde oligopoly problems such as high interest rates.

Jamaican banks have also increased transaction fees which “penalize depositors for having money in the bank”, according to local MP Fitz Jackson. The Jamaican government is seeking to reverse these repressive trends in financial services by introducing the Jam-Dex digital currency. This will help keep the country’s financial system away from the control of monopoly banking giants.

Support in the next two years

Over 70% of the Jamaican population is expected to adopt the new digital currency within the next five years. The country’s central bank, the Bank of Jamaica, hopes to replace at least 5% of Jamaican dollars in circulation each year for the next two years.

The establishment hailed Jam-Dex as a solution for greater transparency. All transactions made on the Jam-Dex network, including government welfare payments, will be traceable to improve accountability.

The Jamaican central bank recently issued a total of approximately J$6 million, or $44,000, to two major banks to conduct real-world testing of the Jam-Dex network ahead of its official debut.

Customers wishing to use Jam-Dex will need to register for a digital wallet and make a deposit through an accredited Jamaican financial institution.

Issues Facing the Unbanked in Jamaica

Due to their avoidance of regulated financial institutions, many unbanked Jamaicans are missing out on progressive socio-economic opportunities. Some government and non-profit aid programs, for example, use regulated financial institutions to distribute monetary aid. Because the unbanked do not have bank accounts, many of them are left behind.

Speaking to Cointelegraph, Daniel Polotsky, the founder of CoinFlip, America’s largest Bitcoin (BTC) ATM network, said:

“Users seeking to open traditional bank accounts are subject to cumbersome approval processes and typically expose themselves to potential overdraft fees or other hidden expenses that they often cannot afford. ”

Another problem that the unbanked face is dependence on exploitative sources of credit. Many of them are likely to take out payday loans due to a lack of access to formal credit institutions. Payday loans are incredibly expensive to finance.

Jamaican 1000 dollar note featuring former Prime Minister Michael Norman Manley. Source: Bank of Jamaica.

Many Jamaicans are addicted to these services because the loans are easy to access, especially in an emergency. This ultimately leads to a vicious cycle of borrowing.

The lack of credit history among the unbanked in Jamaica further contributes to their economic segregation. Credit history is generally required by employers, insurance companies and landlords when considering assistance and compensation. Because unbanked people rarely have these records, they cannot get the help they need.

Many unbanked people also lack substantial savings, and when they do, they keep the funds in unsafe places, usually at home. This makes money more vulnerable to risks such as theft.

The Jamaican CBDC aims to provide financial services to the unbanked, helping them overcome many of the aforementioned issues.

Greater inclusion with a CBDC

The Jamaican digital currency is expected to have a disruptive effect on the Jamaican financial sector, especially for its unbanked citizens.

Financial inclusion for unbanked Jamaicans calls for a radical financial system that promotes inclusiveness, and Jam-Dex has the properties to make it happen.

Polotsky highlighted the importance of these CBDCs:

“Central Bank digital currencies like Jamaica’s are an important step in building widespread familiarity around digital currencies. They also allow underbanked and unbanked people to digitally hold and send money. cash for lower fees than traditional banks, which can be crucial. While not a replacement for cryptocurrencies, these currencies can seamlessly coexist in our digital world.

He also explained that the new Jamaican digital currency will help popularize the use of major deflationary cryptocurrencies such as Bitcoin, which are typically used to hedge against inflation.

The use of digital currency would allow relevant government agencies to monitor purchases of subsidized goods and detect price anomalies.

Fixing consumer prices and combating predatory pricing

Deploying the Jamaican digital currency will allow the government to counter price cartels, especially in cases where there is a need to regulate prices. Such scenarios usually occur when government subsidies cover certain products.

In recent years, Jamaican lawmakers have had to act quickly to enact laws preventing price cartels, especially in times of calamity. Price spikes in the country are particularly prevalent during hurricane season, when opportunistic traders raise the prices of building materials such as lumber, tarpaulin and zinc sheeting.

Early in the COVID-19 pandemic, sanitizers, hand sanitizers and masks were targeted by Jamaican price-gouging cartels, forcing the government to intervene. Fines of up to J$2 million, or $13,066 at the time of writing, have been imposed on retailers who price abused.

Of course, verifying every reported case of price gouging is a time-consuming process. The Jamaican digital currency will make it easier for authorities to verify these reports by analyzing POS records on the blockchain.

Fight against money laundering

Jamaica had a Basel AML Index score of 5.77 in 2021. The national index has been on a downward trend since 2017. The current rating means Jamaica is highly prone to money laundering and schemes. financing of terrorism. The composite index score takes into account many factors, including the country’s levels of corruption, its financial standards, respect for the rule of law and political disclosure.

In 2020, Jamaica was added to the European Union’s blacklist countries after the EU discovered that Jamaica’s anti-money laundering (AML) protocols were lacking.

The country has also been included in the Financial Action Task Force’s gray list, a move that has prevented Jamaican merchants and customers from transacting on major international retail platforms.

The introduction of Jamaican digital currency is expected to improve transaction transparency and help the country overcome its current anti-money laundering issues.

More effective monetary policies

The deployment of Jamaica’s digital currency will allow the country’s central bank to track transactions with the aim of improving monetary policies.

The central bank, for example, would be able to establish aggregate credit ratings against debt when formulating relevant regulatory rules.

James Bond Beach in Oracabessa.

Monitoring CBDCs will also help authorities crack down on companies involved in tax avoidance schemes. This is thanks to Jam-Dex’s transaction traceability.

The Jamaican digital currency will certainly bring many benefits to the Caribbean island nation. Yet its adoption is likely to take a long time due to resistance from politicians and a population fearful of government surveillance.

A section of politicians have already accused the Jamaican government of corruption after it recently announced a J$2,500 incentive to the first 100,000 Jam-Dex users.

Full adoption of Jam-Dex digital currency is expected to take several years due to start-up issues.

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