The LAC region has been in the forefront of Central Bank Digital Currency (CBDC) adoption, with formal introduction in The Bahamas, the ECCU, and Jamaica, in addition to a pilot project in Uruguay
Crypto Assets and CBDCs in Latin America and the Caribbean: Opportunities and Risks
Prepared by M. Appendino, O. Bespalova, R. Bhattacharya, JF. Clevy, N. Geng, T. Komatsuzaki, J. Lesniak, W. Lian, S. Marcelino, M. Villafuerte, Y. Yakhshilikov
Authorized for distribution by Patricia Alosnso-Gamo February 2023
The Bahamas
The Bahamas’ Central Bank Digital Currency (CBDC), the “Sand Dollar”, was officially launched on October 20, 2020, and was the first state-backed digital currency in the world. The main objectives were to boost financial inclusion for communities in remote islands and to strengthen the resilience of the payments system to natural disasters and pandemics. An important additional consideration for launching the Sand Dollar has been the high cost for government agencies to make cash-based payments to citizens who lack bank accounts. There are plans to integrate government agencies in the Sand Dollar network to support digital government payments to individuals to lower this cost. Issuance to date of Sand Dollars has been limited and use of the platform by licensed financial institutions appears muted. As of end-January 2022, CBDC in circulation was less than 0.1 percent of currency in circulation and of broad money.
The nationwide rollout that started in 2020 involved two phases. In the first phase, private-sector players such as banks and credit unions will ready their systems with Know-Your-Customer (KYC) and other compliance checks across low-value, personal and enterprise wallets. The Central Bank of Bahamas (CBOB) has an in-house know your customers (KYC) or e-KYC solution, which all the institutions can use and hence do not need to incur extra costs. This is used to establish which of three wallet levels a user can have. A basic wallet only requires an email address or phone number but no photo ID. However, it is restricted to a $500 balance and $1500 in monthly transactions. The second level requires a government photo ID, and the limits are $5,000 for balances and $10,000 transactions. The third level requires businesses to provide their license and tax filings, with a holding limit of $8,000 to $1,000,000 with unlimited transactions. The Sand Dollar is linked to the existing financial system through a dynamic link, where excess balances in wallets are deposited in a user’s accounts at financial institutions. The Sand Dollar's second phase focuses on preparing essential infrastructure services in the government and private sectors, such as utility companies Phase 2 has been delayed by the new government and it is unclear when this phase will start.
Despite its limited use to date, the Sand Dollar is still assessed to pose risks to financial intermediation, integrity, and cybersecurity. The CBDC could substitute for deposits in commercial banks, with implications for bank funding, profitability, and financial intermediation. Moreover, a digital currency involves costly investments in new technologies, infrastructure, and external expertise. It can also expose a central bank to new risks and introduce new challenges for ensuring financial integrity, while cyberattacks or technological glitches can impact the central bank’s reputation. Its architecture has some features to mitigate risks:
• Financial stability. To limit disintermediation risks and substitutability with bank deposits, Sand Dollar holdings do not earn interest, and a ceiling is in place limiting the amount users are able to hold in their wallets. Moreover, level 2 and 3 wallets are linked to accounts at financial institutions. To mitigate potential runs in case of stress, a circuit breaker has been embedded in the system to prevent massive flows. However, depending on the deposit structure of banks, some banks could still be vulnerable to financial disintermediation and bank runs, and deposits could quickly move from a financial institution to the CBDC.
• Financial integrity. The Central Bank Law and other legislation were amended to reflect the new digital legal tender. The central bank also plans to promote an e-KYC register to maintain identification of individuals who do not maintain such information with banks or other financial intermediaries. Sand Dollar-integrated wallets are enabled with multi-factor authentication features. All mobile devices are required to support a passcode or a biometrics-based sign-in to access the app and complete transactions. The wallets cannot be used outside the country or for FX operations on their own, which reduces their susceptibility to illicit international flows.
• Cybersecurity. The central bank has a unit tasked to monitor cyber risk and is upgrading its IT systems and monitoring systems. All Sand Dollar authorized financial institutions (AFIs) are required to complete robust and intensive cybersecurity assessments by an independent international firm before receiving approval to integrate the Sand Dollar platform with their custom applications.
The central bank is working to ensure the offline usability of the Sand Dollar, so that citizens can still transact even when there is no electricity or cell phone network: the authorities consider off-line functionality vitally important. However, the authorities have encountered unanticipated difficulties in achieving it. During the pilot projects on two key islands in December 2019 and February 2020 it was revealed that the planned solution of local off-line networks – built on introducing local redundancies to the main telecommunication system – did not fully achieve the policy goal. The telecommunication masts required in the solution are vulnerable to the same weather conditions as the main telecommunication system. Also, the geographical reach of the local networks is limited, which makes it difficult to make payments between islands. During the second phase of the Sand Dollar project the CBOB is seeking alternative solutions together with its main contractor.
The Bahamas has stated that the use of the Sand Dollar is exclusively for domestic purposes and that cross-border payments must take place through commercial banks in traditional non-CBDC Bahamian dollars. Foreigners can own and pay with Sand Dollars when visiting The Bahamas by registering for an account with low holding size and monthly transactions’ limits, but cannot transfer or pay with them abroad. However, Mastercard and Island Pay launched Sand Dollar prepaid cards in February 2021 that allow for instant conversion of digital currency to traditional Bahamian dollars, and to pay for goods and services Mastercard is accepted on the islands and also around the world. During the second phase of the project, the CBOB is planning to further explore cross-border uses.
ECCU
The Eastern Caribbean Currency Union (ECCU)’s Central Bank Digital Currency (CBDC), DCash (DXCD), is the first digital currency introduced by a currency union. As a digital form of the EC dollar, DCash is a legal tender of the Eastern Caribbean Central Bank (ECCB) and is developed to serve as a key instrument for facilitating the digital transformation of the ECCU. The idea was initiated by Bitt, a private company, around 2017, which the ECCB incorporated in its 2017-21 transformation agenda. Following the development and testing phase in March 2019- February 2020 - and after a delay due to the pandemic, DCash was introduced on a pilot basis in March 2021, initially in four (out of 8) ECCU countries (Antigua and Barbuda, Grenada, St. Kits and Nevis, and St. Lucia). The DCash pilot project was extended to St. Vincent and the Grenadines in August 2021, to Dominica and Montserrat in December 2021, and to Anguilla in June 2022. The ECCB plans to continue the pilot program until June 2023 to allow all member countries at least one year experience with DCash before drawing lessons from the pilot.
DCash has been launched with a view to improving payment efficiency, financial inclusion, and competitiveness and resilience. The initiative was prompted by the high cost of payments-related banking services and slow adoption of new technologies by the private sector. Cash is expensive to issue and handle in the ECCU, including transportation, storage, and security for both the central bank and the private sector, with many islands that are widely dispersed. Mobile payment is under-developed in the ECCU, despite a high penetration of smartphones. Credit cards and debit cards charge high transaction fees (currently around 3.5 percent). Small firms in the informal sector bear the cost of inefficient payment disproportionately, and many households in these island economies are still under-banked (as the number of credit and debit cards per person is much lower than in other regions with similar development level). Financial friction implied by high payment costs hinder economic growth and make the system more vulnerable to shocks. DCash, which charges no fees for transactions in the pilot stage, can lower the cost of payments and decrease the use of paper cash as well as of cheques, which account for around 80 percent of all transactions. The ECCB has a goal of cutting it by half, to reduce the costs of cash usage.
The DCash has several distinct design features. It is based on private blockchain technology, with all system services, except the minting system, stored at Google Cloud. The ECCB has the sole authority to issue and redeem the digital currency and will be able to fully control its supply. It has a “two-tier system” to fully utilize the comparative advantage of (i) the private sector to interact with customers and carry out the relevant AML/CFT requirements, including the necessary customer due diligence measures; and (ii) the central bank to provide trust and manage the DXCD scheme in line with its payment system policies. The ECCB can observe each transaction data (but anonymously) and the outstanding stock of the DXCD in each digital wallet. The ECCB does not see detailed information about the DXCD transactions (e.g., the identity/name of payers and payees and the purpose of transaction). Financial institutions can fully observe the transaction purpose (e.g., the goods or services payers bought from payees), if either payers or payees are their own customers. They are responsible for maintaining their own clients’ database.
To minimize financial stability risks, the digital currency is designed as a small value retail instrument, with no interest accrued and no use for foreign exchange transactions. The size of its holding and transaction values per wallet is limited and digital wallets bear no interests, to avoid competition with savings accounts of financial institutions. The transfer between digital wallets is only allowed to take place within the ECCU, with no use for foreign exchange transactions. Financial institutions are allowed to control the amounts of digital currency depositors can exchange for deposit accounts, which would help their liquidity management.
To mitigate cybersecurity risks, the pilot is limited in the scope of system integration. Most importantly, the DCash system is not planned to be linked to the ECCB's core payment systems (such as the RTGS), banks' operating systems, and the Automated Clearing House. This is intentional and a prudent approach given (not fully known) risks entailed in the digital currency system. This, however, means that after the pilot, another round of testing will be needed to assess vulnerabilities and risks after connecting the DCash system to other payment and operating systems at the ECCB and financial institutions.
While about three-quarters of financial institutions have participated so far in the pilot, the adoption of DCash so far has been slow, albeit uneven across countries. According to the ECCB, 22 financial institutions, 11 agencies, 292 merchants, and 4,039 end-users in ECCU countries have participated in the pilot program as of end-April 2022. Meanwhile, despite rolling out the DCash pilot only in August 2021, St. Vincent and the Grenadines has become the front-runner in the uptake of DCash, with the participation of 5 financial institutions, two agencies, and about one thousand customers so far, owing to the on-boarding of the largest bank which has readily available resources for launching DCash in the context of its own digitalization efforts. The overall protracted uptake is largely due to the lack of marketing and public awareness as well as resource constraints faced by financial institutions and merchants in the context of increased burden posed by the pandemic and acquisitions and mergers following the exit of several foreign banks from some ECCU countries. In addition, DCash is still relatively unknown to the public, which underscores the need for public education campaigns to raise awareness and informing the various stakeholders about the potential benefits of a CBDC. However, the ECCB expects DCash diffusion to accelerate as it shifts the focus from onboarding countries to marketing and public education campaigns and more merchants and large banks participate in the pilot. The ECCB plans to draw lessons from the pilot once concluded. Nevertheless, no decision has been taken yet on if to continue with the issuance at the end of the pilot program.
In addition, the uptake was interrupted by a two-month outage in early 2022. This was further exacerbated by a lack of timely communication on the extent and cause of service disruption and timelines for recovery. DCash went offline between mid-January to mid-March 2022 on account of a problem with the system’s operational management processes of renewing/rotating digital certificates. This IT operational function falls under the responsibilities of the technology vendor. According to the ECCB, the outage has disrupted only new transactions and on-boarding of new users, leaving the Distributed Ledger Technology (DLT) and existing data/transactions intact. All balances under the pilot program are guaranteed by the ECCB.
The Pilot project provides opportunities to examine risks and assess policy gaps. Ample excess liquidity in the system and the design of DCash as a non-interest retail instrument with holding limits help mitigate possible financial disintermediation risk. However, the effects of the DXCD on the choice of payment instruments and financial institutions’ funding are uncertain, especially under stress, and this calls for the ECCB and national supervisors to closely analyze liquidity and funding conditions of financial institutions, including through liquidity stress testing. Additionally, the ECCB could be exposed to operational and financial risks from malfunctioning of the digital applications, platforms, or infrastructure, due to cyberattacks. The identification of cybersecurity threats and the exploration of risk mitigation measures are important pre-requisites to the DXCD. The data and privacy governance frameworks need to be established to ensure that sensitive financial or personal data is protected.
The DCash experience so far provides some useful lessons for other countries who are considering CBDCs. CBDCs have the potential to increase economic efficiency and foster financial inclusion, but sufficient efforts and resources are needed to raise public awareness and facilitate communication with end-users to boost confidence and uptake. Implementing safeguard measures will help contain various risks to which CBDCs could expose central banks and the financial system, including those related to financial intermediation, financial integrity, and cybersecurity. The DCash outage experience underscores the need to enhance central banks’ operational resilience and business continuity plans, including through incident response planning and ensuring adequacy of skilled resources. It also stresses the importance of clear division of operational, oversight, and risk management responsibilities between central banks and technology providers/operators, and establishing appropriate project management governance arrangements. This is important as failures in CBDC implementation can undermine the credibility of central banks. Moreover, greater efforts in exploring business cases and incentives for the private sector would help promote adoption.
Jamaica
The Jamaican government announced the introduction of a CBDC in March 2021, appointing a technology provider (eCurrency Mint) immediately thereafter and implementing a limited and successful pilot program throughout 2021 that involved four merchants and the National Commercial Bank as a wallet provider. The Bank of Jamaica (BoJ) announced in December 2021 that it will roll out its CBDC across the country in 2022. Its roll-out will include two extra wallet providers and the testing of transactions between customers of various participating wallet providers to verify interoperability. As an important step towards the formal launch of the currency, the Jamaican Parliament passed in June 2022 amendments to the Bank of Jamaica Act and subsequently BoJ (Amendment) Act 2022 (Act 5 of 2022) was duly assented by the Governor General to accommodate the Bank of Jamaica as the sole issuer of CBDC and recognize its CDBC as legal tender. The CBDC is aimed for domestic use and the BoJ projects to replace some 5 percent of Jamaican dollars’ currency in circulation with the new digital currency each year.
The main objective behind the launch of a CBDC has been financial inclusion through a digital currency with no user fees or transaction costs. In addition to financial inclusion, the Bank of Jamaica (BOJ) expects the CBDC to (i) provide additional means of efficient and secure non-cash payment; (ii) increase efficiencies for banks as it relates to the costs for handling and distributing cash; (iii) reduce costs in the currency management process of the BOJ; (iv) provide a socially optimal mix of retail payment instruments; and (v) facilitate interoperability between existing electronic retail payment systems.
In terms of technical design, it is worth noting that the Jamaican CBDC does not use distributed ledger technology - but instead an existing centralized payment system (the central bank’s Real Time Gross Settlement System (RTGS), JamClear) to avoid having to intervene manually to move from eCurrency’s system into the settlement system. CBDC will be issued to banks and to the payment services providers who will distribute it to their customers, clients, merchants and consumers through either an E-money wallet, card networks, or other digital options. To get the CBDC wallet the customers will need to contact a wallet provider of their choice and, if they do not have a bank account use the tax registration number and a government-issued photo ID. The analysis of the customers signing-up for the CBDC will allow the BOJ to assess its contribution to expanding financial inclusion.
The authorities recognize that the CBDC has to provide right balance between the AML/CFT regulations and the privacy considerations. To protect privacy, the CBDC solution support the protection of personal identity through builtin solutions such as encryption techniques, digital signatures, and multi-factor authentication mechanisms. To combat AML/CFT, the CBDC will allow for tracking of all payments by financial institutions and by the relevant authorities under the Proceeds of Crime Act (POCA) when required. Wallet Providers are either regulated or authorized by the BoJ and, therefore, the BoJ is the Competent Authority under POCA for these entities and moreover the authorities believe that the Wallet Providers already have in place effective risk-based AML/CFT frameworks.
To enhance governance, and limit potential reputational risks, an internal BOJ oversight committee was established to provide oversight over the CBDC project’s progress and manage any financial, and nonfinancial risks impacting the BOJ. The committee includes the supervisory, audit, IT, and financial functions of the central bank. In addition, in July 2021 the IMF provided technical assistance to the BoJ on central bank risk management, fintech and security which included risk considerations related to the CBDC and its operation.
Uruguay
Uruguay completed a pilot with e-Peso from November 2017 to April 2018. The Central bank used a simple technology: token-based and relying on a state-owned cellphone company. The e-Peso was linked to a phone number without DLT, the end-users did not require internet connection (just a mobile phone line), and the settlement was instantaneous. There were no costs to either the Central Bank of Uruguay or to the end-users. The e-Peso could be used for payments in registered stores and for peer-to-peer transfers between registered users. Transactions were anonymous but traceable with the users’ wallets. The users’ wallets were encrypted at the Global E-note Manager (GEM) and the e-Pesos were secured at GEM even if users lost their phones or the password of a digital wallet. The unique and traceable digital bills prevented double-spending and falsification.
The total issuance of e-Pesos was limited to 20 million pesos (about US$670,000) and the wallet size to 30,000 pesos for individuals (about US$1,000) and 200,000 pesos for registered businesses. Limits on e-wallets’ size made the ePeso similar to cash and reduced its competition to other means of payments or bank deposits. Transfers between peers with e-Pesos were widespread throughout the pilot period. The number of operations rose with the learning process of users. The pilot was limited to 6 months and the e-Peso bills were subsequently destroyed.
The pilot was followed by an evaluation process and drew some lessons towards a potential future introduction of a CBDC including the importance of the central bank’s reputation and security features, the merits and feasibility of simple technological solutions, and the potential complementarity of CBDCs with other means of payment (see Sarmiento, 2022). The new central bank authorities delayed the move to a second stage of a CBDC project to focus on the rollout of the fast payments system.
Several other countries in the region are conducting studies into CBDCs, at different stages of development including with technical assistance from the Fund. In what follows, short summaries are presented of the status of that work by October 2022.
Argentina
In February 2021, the Central Bank (Banco Central de la República Argentina, BCRA) formally proposed to President Fernandez to consider the introduction of a digital peso. However, according to Alfonso et al. (2022) the BCRA is not prioritizing the issuance of a CBDC - though it would continue researching it. To improve the speed of and access to payments, the BCRA relies on the initiative Transferencias 3.0.
Brazil
The Central Bank of Brazil (BCB) decided to explore the possibility of introducing the Digital Real, a CBDC, by creating an internal working group in August 2020 that included all areas of the BCB. This project is the next step of a comprehensive set of reforms that started more than a decade ago aiming at leveling the field for fostering new business models and other innovations in the financial services industry based on technological advances, enhancing the efficiency of the retail payment system, and eventually increasing the efficiency in cross-border transactions.
The introduction of Pix, an instant payment platform, in November 2020 was a key milestone in the evolution of Brazil’s payments system. This platform enables the instant execution of electronic payments and transfers and is the result of extensive consultation between the BCB and participants in the payment system since the creation of the Working Group on Instant Payments in 2013. The BCB (i) issues the regulation that governs Pix and supervise its compliance, and (ii) manages the platform´s technological infrastructure. This centralization allowed the BCB to provide a public, safe, and low-cost infrastructure that is highly integrated with market players in the Brazilian payment system that intermediate between final users and the Pix´s instant payment system. By the end of 2021, transactions in Pix surpassed both credit and debit card transactions thanks to a network that includes close to 800 private PSPs, including traditional banks and fintech companies (Figure 9.1). The Pix also served almost two thirds of the adult population and close to 60 percent of the firms interacting with the national financial system. Furthermore, the cost to merchants of accepting retail payments is much lower than credit and debit card payments (Figure 9.2). Interestingly, this innovation has been widely accepted by all financial institutions since the total number of transactions has increased for all parties thanks to increased financial inclusion in Brazil.
The Digital Real could aim at creating an additional layer to the digital payment system building on innovative technologies and policies under the BCB’s regulatory umbrella. The BCB is considering features of programmable money for the development of smart contracts using the Digital Real to help expand the range of digital payment services and stimulate the development of digital innovations. Additional policies, like the introduction of the Open Banking initiative since the beginning of 2021, could also contribute to fostering competition in the provision of these innovative financial services. Open Banking allows customers to share their financial data with other institutions under the BCB supervision to allow them to compete and offer alternative financial services.
As part of the proof of concept of its CBDC, the BCB has launched a new edition of the Lift Challenge focused on the Digital Brazilian Real. To identify concrete projects in such a dynamic context, the last edition of the Lab for Financial and Technological Innovations´ (Lift as in its Portuguese acronym) Challenge called for projects related to CBDC. The BCB selected 9 projects from different institutions that include traditional banks, credit card, fintech, and technological companies, DeFi lending platforms and crypto assets’ exchanges. The pilot implementation of these projects is expected in 2023 and enlighten further discussion on the future of the Digital Real.
The BCB would eventually decide the characteristics of its CBDC in 2024, after testing its own pilots in 2023. The Digital Real would be issued by the BCB and under the custody and distribution of the Brazilian Payments System. Although it is too early in the process to envisage the characteristics of the Digital Real, the BCB has suggested that it would most likely be online given the technical difficulties of an off-line CBDC, although an offline option has not been discarded. It would not bear interest to limit potential financial disintermediation risks. Its introduction would need a change to the Central Bank Law, but it would not affect existing data privacy and security provisions that are embedded in Bank Secrecy and Brazilian General Data Protection Act. A CBDC would need to comply with court orders to track illicit transactions, a task that a CBDC is likely to facilitate efficiently. The systems already in place, including for Pix, may support domestic interoperability. The BCB is keen on engaging with other jurisdictions to ensure interoperability across borders and to reduce the costs of cross-border payments.
Chile
The Central Bank of Chile (BCCh) has published a white paper and has called for a public survey to evaluate the risk and benefits from the potential issuance of a retail CBDC. The BCCh established a working group to assess the existing retail payment system and evaluate the issuance of a CBDC in 2021. It published a first white paper with a preliminary assessment of benefits and risks of issuing of a retail CBDC. The paper found that the Chilean retail payment system was adequate for the needs of the Chilean economy and highlighted the principles that a CBDC should follow. It concluded that, although a retail CBDC could address several of the challenges from the rapidly changing payments ecosystem, the decision to issue a CBDC should be based on a thorough cost-benefit analysis. To better inform this analysis, in July 2022 the BCCh called for a survey to the citizens and corporates about the risks and benefits from the potential issuance of a retail CBDC. The respondents had until October 2022 to answer the survey. The BCCh is currently working on a second stage of digital currency exploration, holding seminars, talks and roundtables to get feedback from the private sector, especially on financial stability issues. A second report is expected to be published in the first half of 2023.
Colombia
The Banco de la República (BanRep) began research into retail CBDCs in 2017 in the context of the need to further develop its instant payment system. Although the use of e-payments has grown since the pandemic, it is still lagging behind that of peer countries. In its study, BanRep focused on the impact of a CBDC on financial intermediation and credit supply, financial inclusion and stability, monetary policy transmission, as well as on the impact of foreign CBDCs. BanRep will continue further cost-benefit analysis of CBDCs.
Peru
The Peruvian authorities conducted an initial assessment of the possibility of introducing a CBDC with technical assistance support from the Fund following the principles suggested in section I.B above. [add reference]. This meant probing the underlying assumptions to the problems facing the Peru payment system and identify potential solutions (which may or may not include the introduction of a CBDC).
Despite recent efforts, financial inclusion and the adoption of digital retail payment services in Peru are low. Building on its 2015 financial inclusion strategy, Peru developed a National Financial Inclusion Policy (PNIF) in 2019 to promote financial access to all segments of society. Despite the associated efforts, still 48 percent of the Peruvian population was unbanked as of mid-2021. The lack of financial inclusion is more acute among rural residents due to generally lower incomes and wealth and geographical factors like low population density in rural areas that make banking services less accessible and more expensive. Promotion of an effective digital payment system has not been a solution as major e-wallet providers do not interoperate among themselves or with unaffiliated bank deposit accounts because the largest banks operate in their own closed-loop systems. BIM, a national platform to ensure interoperability of e-money payments, fails to support connectivity with unaffiliated e-money issuers or bank deposit accounts.
Initial analysis point towards several barriers against financial inclusion and digital payment adoption in Peru. They include (i) limited digital and financial literacy, (ii) insufficient telecommunications infrastructure, (iii) a “culture of cash” and high informal labor participation, (iv) low wages and wealth levels, (v) elevated fees and fragmentation (lack of interoperability of solutions) in the banking sector, (vi) distrust of financial services and preferences for privacy, and (vii) limited access points including digital infrastructure especially in more remote locations. Surveys conducted by the IMF highlighted some motivational, capacity, and behavioral factors that would reinforce the preference for cash, including concerns on high costs, the preference for informality, low ubiquity of current solutions, and related low perceived benefits of digital solutions.
The IMF mission identified as viable solutions to enhance digital payments either to reinforce existing payment instruments and systems or to introduce a CBDC. The first option would entail an intervention by the central bank of Peru to mobilize stakeholders to interoperate existing stores of value (e.g., accounts, digital money, and e-money) and connect and enhance a select set of existing payment systems to be fully interoperable and accessible to all (e.g., faster payments and/or debit cards). The issuance of a CBDC (in tokenized form in Peru) would require a sound legal basis to ensure a high level of legal certainty, legal tender status, regulation, and oversight of relevant actors, and more generally the mandate of the BCRP to carry out necessary functions and pursue interoperability. All this would need to be accompanied by capacity building across the jurisdictions to ensure that regulatory, supervisory, and law enforcement authorities are equipped to adapt to the introduction of a CBDC. In any case, a robust evaluation of technical, operational, regulatory, financial, and economic risks of CBDC or alternative solutions will need to be conducted before making a decision in one way or another.
In that context, three critical enablers and four specific factors were identified as foundational elements for the successful introduction of any solution. The critical enablers include: (i) creating a clear and compelling vision to enhance payment services to the financially excluded; (ii) the inclusion, involvement, and support from stakeholders (both public and private sector); and (iii) a facilitating mechanism to enable cooperation between competitors (such as a payment system management body). The four factors to catalyze the adoption and usage of solutions include (i) efficient “on and off ramps” between cash and the digital payments ecosystem; (ii) provision and promotion of digital payment solutions by government and businesses (including awareness campaigns and appropriate pricing); (iii) the widespread availability of payment acceptance infrastructure; and (iv) solutions that support multiple types of payments.
Finally, it is worth mentioning the introduction of a digital wallet by Ecuador in 2014 as an initiative that could appear as a failed CBDC. It involved the issuance of digital currency by a central bank that was not the issuer/“owner” of the currency in a fully dollarized economy that has the U.S. Dollar as the sole legal tender. The digital currency was offered directly by the Central Bank of Ecuador with the stated objective of promoting financial inclusion and backed in principle by U.S. dollar assets in its balance sheet. The central bank kept all the users’ personal data and transaction records at its platform. This initiative did not attract much demand and it was abandoned in 2018 in the context of distrust about the true reasons for its creation and potential risks of dedollarization and monetary instability. In fact, a sharp fall in international oil prices during the 2014-2018 period led to large fiscal deficits that were partly financed by the central bank’s international reserves. The lack of credibility would explain why Ecuador’s digital wallet initiative was not successful (including as an engine of financial inclusion) in contrast to the experience of other emerging and developing economies around the world.
Lessons and Policy Recommendations
The onset of crypto assets and CBDCs is transforming money and payments. The description and analysis in this paper of the experiences in LAC stress the opportunities and risks brought about by them and their underlying technologies for a diverse region facing challenges ranging from relatively low financial inclusion and fragmented payment systems to volatile macroeconomic conditions and capital flows. As shown by the recent sharp fall in their values, crypto assets imply more risks than benefits (particularly given the lack of intrinsic value of unbacked crypto assets) but should be expected to continue to be part of the payment system’s landscape. By contrast, (properly designed) CBDCs could help achieve some public policy objectives, including facilitating remittances. In that context, some policy recommendations are laid out below in terms of enhancing the policy and regulatory frameworks to respond to crypto assets’ risks, using digital currencies to enhance cross-border payments, and introducing CBDCs.
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