Could a digital Caribbean guilder improve financial inclusion in Curaçao & Sint Maarten?

Around the world, more than 60 central banks actively research the possibilities of a Central Bank Digital Currency (CBDC) as a digital form of cash provided to the public. The website cbdctracker.org is taking stock of the many different projects. The Centrale Bank van Curaçao en Sint Maarten (CBCS) is among those analyzing the effects of a digital Caribbean guilder for Curaçao and Sint Maarten alongside the usual banknotes and coins. One of the reasons to consider a digital Caribbean guilder is the potential positive impact on financial inclusion. How could this work?

The CBDC would be distributed to the general public through intermediaries such as commercial banks and other payment service providers. The public would have to load the digital currency on a wallet app installed on their smartphone via their commercial bank or by topping up at another payment service provider (such as a top-up agent). The key difference with digital money on a bank account or other prepaid cards, is the counterparty being the central bank. The balance on the app will just like banknotes and coins appear as a liability on the balance sheet of the central bank.

Recent surveys about payment behavior in Curaçao (2020) and Sint Maarten (2022) indicate that a high number of respondents still pay their bills with cash and a considerable number are not ready to reduce or stop the use of cash in the near future. Furthermore, from the results of the survey, it can be concluded that 12% of Curaçao’s population and 17% of Sint Maarten’s population is totally unbanked. Thus, these individuals are fully cash-based, without access to digital financial services such as those provided by banks. The most relevant reasons provided by the individuals for not having a bank account are not having proof of income (employment contract), not having enough money, and/or not having a local ID. These findings make opening a bank account difficult.

The question is how to provide these individuals access to digital financial services thereby adding to the objective of increasing financial inclusion in Curaçao and Sint Maarten. The introduction of a digital Caribbean guilder could provide a basis to achieve this objective. If the digital Caribbean guilder is distributed through payment service providers such as non-bank agents, the individual has the option to download a digital wallet on his smartphone and top up this wallet with a cash deposit at the agent. By not putting a minimum amount for the top-up, access will then be granted to everyone to the CBDC system since the individuals are not restricted based on having income/employment and/or enough money. The individual could then use this prepaid electronic wallet to access digital financial services such as electronic payments. In this case, the individual would no longer be dependent on a bank account, but on the operability of the CBDC system. If interoperability is secured it will be possible to pay your utilities, taxes, insurance bills, and the like with the balance in the wallet.

A regulatory issue is how to provide non-bank access to the system and prevent users to engage in money laundering or financing of terrorism. Bank accounts are subject to regulations and supervision to prevent these activities, but the providers of these digital wallets aren’t banks. The need to prevent money laundering and terrorism financing leads to the technological challenges to verify user identity “remotely” and satisfy “know your customer” (KYC) and other regulations with wallets issued by nonbank entities. Stored-payment devices, like prepaid cards, are easy to create, but quite difficult to protect against illegal use. The identity issue could be resolved by applying alternatives for physical ID – such as one-time passwords, PINs, and biometrics - while transacting in digital money. Furthermore, allowing a scaled approach to KYC requirements in the digital wallets issued by non-banks could mitigate the KYC issue. In other words, if the transaction amounts on the wallet remain small no additional requirements are needed.

A digital Caribbean guilder can thus be leveraged to foster inclusion. The following factors are necessary for this respect:

a.CBDC must have universal acceptance. As mentioned, cash payment is still predominant in Curaçao and Sint Maarten. A limited cash-in and cash-out infrastructure, like the “only swipe policy’ as applied for government payments and some stores in Curaçao, is a key prerequisite for driving the adoption of digital payment instruments.

b.CBDC should be easy-to-use. Although a great portion of the population of Curaçao and Sint Maarten owns a smartphone, there is still a large number of people that experience difficulties operating smartphones and/or apps. They are only familiar with the basics, which makes it necessary for the respective CBDC wallet app to be ‘easy’ to manage in order to promote financial inclusion.

c.CBDC should reduce costs. Since CBDC could reduce common barriers to financial inclusion it could lead to lower transaction costs. However, the operator of the CBDC system, CBCS, and the non-bank entity generally need to pass on their costs of operating to the end users. Although these costs may actually be lower than the costs of using cash (incl. printing, distribution, etc.) or other payment methods, the fact that these costs are explicit may lead individuals to avoid using these services, in the belief that just using cash may be cheaper. Giving proper attention to the cost involved in the applied business models is therefore crucial to stimulate the use of CBDC.

d.CBDC should be interoperable with other payment methods. For a CBDC to serve as a widely accessible means of payment, it would need to be readily transferable between customers of different intermediaries (including commercial bank electronic money systems). The ability to transfer value seamlessly between different intermediaries makes the payment system more efficient by allowing money to move freely throughout the economy. Revising and restructuring the payment systems in Curaçao and Sint Maarten would therefore be necessary to increase the inter-operability of the CBDC with other payment systems.

As appears from the above, several conditions need to be met for the deployment of non-bank issued electronic CBDC wallets to make way for successful adoption and in doing so foster financial inclusion. This was also remarked in the recent IMF Article IV consultation of the Bahamas of April/ May 2022 in which the IMF advised the central bank of the Bahamas to accelerate its educational campaigns and to continue strengthening internal capacity and oversight in order to increase the adoption of the sand dollar in the Country. Furthermore, data privacy protection and cyber security are also very important to guarantee that the user’s information in the digital wallets is properly protected. Finally, business continuity is important since you don’t want to experience a massive outage of the system to avoid loss of confidence by the general public.

The introduction of a digital Caribbean Guilder might provide opportunities to encourage financial inclusion. However, the advantages of a digital Caribbean Guilder are not yet convincing given the current state of technology, the experience in other Caribbean countries, and the level of digital literacy of those concerned. Priority has been given to providing everyone access to regular banking services and to the legislative initiative to support this in Curaçao and Sint Maarten. The international developments around central bank digital currencies and the potential of a digital Caribbean Guilder will continue to be topics to actively follow with great interest.