Gearing Up For A Digital Dollar

ECCB Governor updates industry on plans for regional cryptocurrency

[dropcap]T[/dropcap]he Eastern Caribbean Currency Union (ECCU) may soon be trading in digital dollars as the Central Bank moves to reduce its dependence on paper currency. Speaking at the Caribbean Association of Banks’ 45th conference last week, Governor of the Eastern Caribbean Central Bank (ECCB) Timothy Antoine said around 80 per cent of all purchases in the region are paid for with cash or cheque and he wants to see that reduced by half in the next five years.

In March the ECCB signed an agreement with Barbados-based fintech group Bitt Inc to develop blockchain technology and create a cryptocurrency to circulate alongside the existing fiat currency. In the months since then the bank has been focused on engagement with financial institutions, fintech firms and consumers to hammer out the details and is now on the cusp of launching the 18-month pilot project. The initiative will be trialled in two countries before being introduced to the entire ECCU.

Governor Antoine said the emerging fintech ecosystem in the Caribbean has great potential, but also significant risks. He highlighted the role of regulators in creating a viable framework in which innovation can safely take place, saying: “Regulators need to lean forward rather than lean back in respect of fintech development. A proactive and balanced approach is required for us to be able to support innovation, promote inclusion and, at the same time, ensure customer protection.”

SUPPORTING SANDBOXES

The ECCB’s cryptocurrency and blockchain initiative will address several key issues including cybersecurity, user experience, operational and cost efficiencies and KYC and AML/CFT concerns. It is expected to improve the risk profile of the ECCU and therefore help mitigate de-risking and the loss of correspondent banks. The scheme will also create a digital payments system to make transfers easier, faster and less expensive.

Given that fintech is a new and evolving space, developing sandbox environments like the Bitt Inc and ECCB team-up, where services can be tested, tweaked and finalised under a regulator’s supervision, is vital. There are a growing number of fintech sandboxes springing up in the Caribbean as the financial community seeks to exploit emerging technology. The Central Bank of Barbados recently joined with that country’s Financial Services Commission to create a sandbox where they can monitor fintech entrepreneurs and their products and services. Earlier this year, the Bank of Jamaica shared its plans to develop a similar sandbox training ground and was greeted with enthusiasm by the industry, receiving numerous applications ranging from cryptocurrencies, a digital wallet application, digital currency exchanges, securities blockchain platform and KYC databases.

Governor Antoine praised the sandbox approach and called for further collaborative efforts, saying: “A sandbox allows both fintech operators and regulators to test and learn. We need cross-border sandboxes because the reality is that technology knows no borders.

“Effective partnerships and collaboration are critical between banks and fintech providers, between banks and regulators, and amongst regulators. There is absolutely no way for us to leverage the promise of fintech without coming together. I cannot stress that enough.”

STRIKING A BALANCE

When it comes to fintech, industry must find that delicate balance between risk and reward. “In this euphoria of high-growth fintech, there is the tendency to see an obsession over opportunities or an obsession over risk. If we are obsessed with opportunities, we go overboard and become reckless. On the other hand, if we become obsessed with risk, we become feckless and that too is not a desirable outcome,” said Antoine.

And yet, he stressed, it’s important to be cognisant of the risk involved. Any emerging technology comes with heightened vulnerability in terms of security, data protection and privacy. “Whether you are a bank or a regulator, ultimately it is about the customer. We are trying to avoid the customer getting hurt.”

The ECCB wants to see a renewed focus on strengthening data protection in the region, with greater consideration of data sovereignty as information becomes more fluid. According to Antoine: “Our framework is inadequate. It does not cover some of the issues with emerging technologies. There will have to be an upgrade or a revamp of the legislation.

“It is important that regulators sharpen their understanding of risk. We have to avoid blindspots. It is very easy in this rapidly-evolving space to miss things. Data protection issues have to be addressed properly region-wide. Technology knows no boundaries, we have to find a way to manage it.”

Industry-led innovation is transforming the sector but, in the race to be first to market, regulatory concerns can often be brushed aside or overlooked. Antoine cautioned banks and other financial institutions to be wary, to properly evaluate their partners (who may not be subject to the same regulatory provisions) and to clarify their goals when developing fintech applications — first identifying the consumer need and working backwards from that starting point. He said: “One of the things we have learned about fintech [is that] you have to be clear on the problem before you come to what the solution might look like.

“The challenge we have is that countries want to move ahead. There is a danger that people will rush ahead and not appreciate the risk [or consider] the appropriate regulatory environment, and people and economies will get hurt. Transformation is going to be disruptive. It is not some pedestrian cruise in the park. We have to figure it out.”