The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The digital Bahamian dollar will be non-interest earning with accounts capped at a certain amount to protect the financial system’s stability, the Central Bank’s governor has revealed.

John Rolle, in a briefing on 2019 first half economic developments, said Bahamians are “not going to earn interest on sand dollars” and will not be able to “put more than a certain amount of sand dollars in your wallet” as a means to safeguard the financial system’s integrity.

The term “sand dollars” refers to the name given to the initiative to develop a digital version of the Bahamian dollar, “Project Sand Dollar”, with the Central Bank and its chosen provider, NZIA Ltd, now working to launch the test project in Exuma.

The digital currency restrictions are also laid out in the Central Bank’s just-released Financial Stability Report for 2018, which describes them as essential “safeguards” to protect the financial system.

“While strictly adopting anti-money laundering/counter terror financing and anti-proliferation safeguards, a retail Central Bank issued digital currency (CBDC) system will incorporate safeguards to preserve financial stability,” the report said.

“One option would entail the creation of retail accounts, held with the Central Bank, which would be non-interest bearing and which would be capped in terms of the amount of funds that individuals could deposit into them. This would avoid the perception that the Central Bank intends to accumulate domestic resources, which ought to best be intermediated by the private sector/

“Above these defined thresholds, digital wallets would have to be linked to transactional deposit accounts with commercials banks or other regulated deposit-taking entities. Although commercial entities and the public sector would be able to act as the originating and terminating points for large volume currency payments, they would in all cases be required to house the material terminal flows in deposit taking institutions.”

The Financial Stability Report added that the Central Bank is also proposing “circuit breaker mechanisms” to prevent any destabilising surge of funds between financial institutions stemming from the digital Bahamian dollar.

“An identified financial stability concern relates to the fact that, in a crisis of confidence scenario, and without safeguards, CBDCs could expose banks to a rapid loss of deposits, which could lead to the failure of weak entities,” the Central Bank said.

“The pilot phase of ‘Project Sand Dollar’ will allow for some controlled enhancement of the real time payments mechanisms and, where necessary, a scaling of parameters and limits which relate to transactions that apply for various categories of users.

“In all outcomes, a CBDC would not be proposed as a deposit substitute, but as an enabler for expanded access to the existing regulated financial services.”

Meanwhile, Mr Rolle said the Central Bank’s exchange control liberalisation initiative had generated significant interest. “We have seen a pick up in terms of the volume of interest in making investments in capital markets abroad,” he added.

“We’ve seen increasing interest from trust companies that typically focus on international business. We’ve seen six of those come in over the last year to amend their licence to do business with Bahamians.

“It costs much less than $100,000 to have a general trust company licence, but when you apply for a licence to do business with the Bahamian market that’s $250,000 in terms of what the annual fee structure looks like. They’re planning for the medium term in terms of Bahamians having more foreign currency focus.”

Mr Rolle, though, said there was unlikely to be “any explosion of interest” in international banks and trust companies doing business in the domestic economy as a result of the recent legal reforms that broke down the barriers between the two sectors to bring The Bahamas into compliance with the European Union’s (EU) demands.

He suggested that the need to raise deposits and funding locally, as well as the relatively small size of the Bahamian market, were factors mitigating against efforts by the international financial services industry to “cross over”.

The Central Bank governor also pledged to tackle long-standing complaints by Bahamian merchants about relatively high credit and debit card fees, suggesting that part of the solution lay in making “domestic infrastructure” more important when relaying payment information and moving funds.

In the absence of its own SWITCH system, The Bahamas has to rely heavily on Visa and MasterCard to perform this role. “These are issues we are going to be tackling directly,” Mr Rolle said. “We have the National Payments Council, and we have started to look at bank fees... and at how to reduce those.”

The card fees were flagged up by the International Monetary Fund’s (IMF) recent Article IV report, which urged local banks to stop “penalising” Bahamian merchants for accepting debit card payments by levying “unjustified” transaction fees.

The fund, in its newly-released financial sector assessment on The Bahamas, said there was “no economic rationale” for the banks to apply the same processing fees for credit and debit card transactions given that the former’s costs are higher.

It added that many Bahamian merchants were also unaware that they can negotiate these processing fees, known as the merchant discount rate (MDR), with the bank that maintains their business account. As a result, it said many companies were paying higher transaction fees than necessary on every debit and credit card payment they accept.

The IMF warned that card-related fees were another potential obstacle to the Central Bank’s drive to shift the Bahamian payments system from its traditional reliance on cash to electronic transactions, and called for merchants to be “incentivised” into accepting digital commerce.