The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

A former International Monetary Fund (IMF) expert yesterday warned The Bahamas against allowing its Sand Dollar digital currency to compete with the commercial banks on interest rates.

John Kiff, addressing the RF Holdings Bahamas Economic Outlook webinar, also said the proliferation of cryptocurrencies can create “integrity problems” over which digital currency to trust.

He added that Central Bank-backed digital currencies (CBDC), such as the Sand Dollar, should counter this through the “design of multiple tiers of digital currencies, so there is not just one”. He explained: “So you have one tier that’s relatively anonymous, but has severe limits on how big a transaction one can do, how much they can hold.

“And then, as you move up the scale, and what we call KYC or Know Your Customer, the amount of information the user has to provide, and the amount of surveillance that they might have to accept, that only increases as you go to larger amounts.

“You get to the extreme where merchants would have the ability to handle large amounts of money, but also accept lots of surveillance on what they’re doing.” This is how the Central Bank has already structured the Sand Dollar.

However, Mr Kiff warned against following other central banks that have begun to “remunerate” or “pay interest on these digital currencies. This could lead to the “downside” of central banks raising interest rates to the point where the digital currency becomes too attractive and it begins to compete with commercial banks.

He explained: “The downside to that is that you make that interest rate too attractive. You compete now with the commercial banks and you have a problem, which they call disintermediation, where you make the interest rate so attractive that everybody wants to hold central bank digital currency.

“Of course, the banks do need these deposits, so they could lend out money and keep the, you know, keep the economy rolling, but they have a problem they’ve been through then.”

Mr Kiff also said the development of central bank digital currencies is coinciding with the increased willingness of consumers worldwide to use digital payment options because of the COVID-19 pandemic.

He added: “Certainly the pandemic around the world has been a catalyst for the thought process around central bank digital currencies. Firstly, because there’s now this aversion to paper money and the transmission of the virus through paper money, and also people really don’t want to come into contact with one another because now they’ll hold out the little terminal and ask to please just put your card in there.”

Mr Kiff advocated that less developed countries than the US, where there are countless options for digital payments, can benefit more from digital currencies “because they can fill that gap and supply people with some form of currency that can be used without threat and that is safer to use”.