By now, you would have heard that Jamaica’s central bank, the Bank of Jamaica (BOJ), like many central banks around the world, has plans underway to venture into the virtual innovation known as digital money.

Digital money, also known as central bank digital currency (CBDC), is any kind of money or payment that does not exist in physical or tangible form but purely electronically. So, there are no cheques, banknotes or minted coins that you can see and touch, but rather, digital money which is strictly accounted for and transferred via electronic codes in computers. It is issued and regulated solely by the central bank, like other forms of currency, and is therefore completely legal tender.

Why CBDC?

I know what you’re thinking: Aren’t there already so many different, and effective, modes of payment. Why do we need another one?

The simple answer: Progress. Civilisation is a process toward which we are all inevitably marching. Who doesn’t look today at the idea of rubbing sticks together to create fire as backward? Yet, primitive man did exactly that. We make improvements on the way we lived yesterday so that our tomorrow can be better. And, always, there is initial resistance to change, the thing that is unknown. There is a saying that every advance in civilisation has been denounced as unnatural while it was recent. You can substitute the word unnatural for unnecessary. What if we had continued bartering to pay for goods and services back in the 20th century?

Benefits of digital money

While Jamaica isn’t the first country developing digital currency, accelerated by the ongoing coronavirus pandemic (China is already testing the digital yuan in certain Chinese cities, and other global central banks in the US, Great Britain, France and South Korea are already working on similar steps for their own state currencies), we are leading the charge in the Caribbean. As the Jamaican society moves towards becoming one that is increasingly digitalised, the need for a more secure and seamless use of money must invariably come to the fore. This will be addressed by the use of CBDC, which BOJ plans on issuing to commercial banks as well as any other deposit-taking institutions (DTIs), like building societies and licensed and authorised payment service providers.

Firstly, because CBDC is money that exists purely in digital form it will be exchanged via technologies like smartphones, credit cards and other cryptocurrency exchanges. (The term cryptocurrency refers to another form of virtual digital currency that uses encryption techniques to control the creation of monetary units to verify the transfer of funds. It is private and unregulated and exists under the control of that currency developer. Bitcoin is one such example.)

The CBDC our BOJ will issue is strictly for domestic use, which means it will be exchanged on a one-on-one basis as an alternative to cash, and households and businesses will be able to transact payments at any time via a compatible electronic device. Convenience, in terms of how it will broaden our modern payment system, is the biggest benefit.

It’s also very seamless, secure and easy to use, affording even people currently without regular bank accounts access to CBDC by way of an account that is extremely easy to obtain, while people who already have bank accounts will be able to automatically obtain a CBDC account.

CBDC also benefits the financial ecosystem in terms of systemic efficiency as well as cost savings because of the significant reductions in the associated costs of storing and distributing traditional money. It requires no intermediary, so is often the cheapest method to trade currencies while providing transparency in dealings by generating necessary record-keeping.

Disadvantages

If there is a drawback it’s that CBDC, though having the major characteristics of traditional fiat money, will not, like those other forms of money, attract interest when stored in an account. This isn’t to say that there aren’t more formidable problems that always plague electronic systems, such as fraud and hacking. Also, digital cash can be thought of as a good way for criminals to launder money.

And, too, because CBDC allows people to basically become their own private bankers, it will have the effect of DTIs reducing retail employee headcount, aka the dreaded job redundancies.

CBDC is a new system which will constantly be refined to cut down on the risks. In the meantime, the pros far outweigh the cons, and so it is being adopted rapidly across the world. It’s the price one pays for progress.

How will it work?

In order to carry out CBDC transactions it’s as easy as downloading a mobile wallet app to your smartphone, tablet or any other compatible device, using either telecoms service providers. Accounts can be topped up through authorised agents or smart ABMs, and do business using CBDC phone-to-phone.

Preparing your mind for change

The truth is, we live in an age of technology, the main characteristics of which are change and evolution, and as technology increasingly advances there will be less use for tangible, fiat money. The ongoing pandemic has shown us that, more than ever before, global economies need payment instruments that can be made quickly, cheaply, and without unnecessary third-party interventions. This is not to say that traditional money will be outmoded; CBDC will merely operate alongside it in the payment space in the not-too-distant future.