Oran A. Hall Benefits of a central bank digital currency
A DIGITAL currency is legal tender issued by the central bank, such as the Bank of Jamaica (BOJ), and complements physical forms of currency like notes and coins.
It has the same value as the other forms of currency, so it can be exchanged one-for-one with banknotes and coins.
Jamaica’s Central Bank Digital Currency (CBDC) is called JAM-DEX.
JAM-DEX is backed by the BOJ, which has sole authority to issue it. It is solely for domestic use – use in Jamaica only.
The BOJ Fintech Regulatory Sandbox assesses the institutions that desire to offer the digital currency to consumers and businesses.
The BOJ issues the currency to deposit-taking institutions (DTIs) – commercial banks, building societies, and merchant banks – as well as authorised payments services providers (PSPs), all of which it must license and authorise.
These entities then distribute the CBDC to their customers – businesses and individuals – through digital wallets, bearing their own unique name, such as Lynk in the case of National Commercial Bank. The customers, upon receiving the currency, are able to transact business.
The digital currency fulfils all of the functions of money: store of face value, medium of exchange, single unit of account, and a standard of payment. It is real money, in other words.
While it serves to facilitate transactions, it does not replace other means for facilitating transactions such as cash, cheques, credit cards, debit cards and online transfers; it is just another option.
To be able to get a digital wallet, one must open a CBDC account, which is different from a regular bank account. Money stored in a digital account does not, however, earn interest, and customers are able to convert and transfer funds seamlessly between regular and CBDC accounts.
A CBDC account offers a wide range of benefits. One is access. The account-opening process is quite simple. For example, it employs a simplified know your client (KYC) process and no money has to be put into the wallet at the time it is opened.
Additionally, people who have a bank account are able to automatically obtain a CBDC account. Overall, the process makes it easier for DTIs and PSPs to bring the unbanked into the financial system.
Another benefit is convenience. The consumer can carry out transactions anywhere any time and can access, download, and deploy a mobile wallet app on any mobile phone, tablet, or similar device using the network of both major telecom service providers. Customers can also top up their accounts through all authorised agents and smart ABMs, and do business phone-to-phone with merchants.
Additionally, a customer can convert CBDC to cash at any smart ATM or go to any wallet provider, and to the extent that there is less need to do physical and face-to-face transactions, much time can be saved.
Cost is another benefit. No fees are charged for CBDC transactions – payments and transfers. Neither are there telephone or data charges for CBDC transactions. Even the costs for merchants and banks are reduced as the costs associated with the handling and securing of cash do not arise.
The CBDC is safe and secure: it has anti-counterfeiting features, only the wallet provider has access to the customer’s information and transactions, and data are protected.
It can be used for a wide range of transactions. It can, for example, be used to pay wages, and pay for goods and services, and can be used as a form of payment on e-commerce sites if the wallet provider provides the service.
Digital currency is perhaps a good tool for people who find it difficult to control spending as it is not a credit facility and spending is constrained by the sum of money in the digital wallet at any time.
It can also serve as an effective tool to teach children to spend only what they have and to do some of their own shopping in a disciplined way. Children are allowed to have CBDC accounts if their parents open them for their use.
By using CBDC, people who do not have a bank account and those who may have one but rarely use it can become active participants in the financial system. Not being required to have a bank account or to open one to get a CBDC wallet makes entry into the financial system much easier.
As they spend, transfer and receive CBDC, they create and build a transaction history which can be used to open the way to source loan financing, which, if used well, can boost financial well-being.
– Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email finviser.jm@gmail.com.