The central bank of Jamaica digital currency and the problems it hopes to solve

The Central Bank of Jamacia recently announced that it will launch its central bank digital currency (CBDC) dubbed the Jamaican Digital Exchange or Jam-Dex in the first quarter of 2022. According to the Jamaican government, this will be the national digital currency, helping reduce transaction costs while allowing those unbanked to access financial services.

it is estimated that over 17% of Jamaicans are unbanked, but it is feared many more are underbanked. This is largely due to systemic impediments in the financial sector. High transaction costs in particular are a major limitation. Consequently, many Jamaicans believe that banking is a domain of the wealthy.

That is, Internet penetration in Jamaica boasts impressive at over 55% while cell phone usage is at 100%. The Jamaican government is capitalizing on this positive technological momentum to drive the adoption of its national digital currency.

As things stand, the Jamaican banking sector is highly centralized. Two banks dominate over 60% of the country’s entire banking sector. The situation has created healthy competition and has caused declining oligopoly problems like high interest rates to worsen.

Jamaican banks also have hiked up Transaction fees that “punish depositors for having money in the bank,” according to local MP Fitz Jackson. The Jamaican government is attempting to undermine these oppressive financial services trends by launching the Jam-Dex digital currency. It will help take the country’s financial system out of the control of monopolistic banking giants.

recording in the coming years

It is expected that over 70% of the Jamaican population will adopt the new digital currency within the next five years. That’s what the country’s central bank, the Bank of Jamaica, is hoping for substitute at least 5% of the Jamaican dollars in circulation each year for the next few years.

The establishment has hailed Jam-Dex as a solution to greater transparency. All transactions made through the Jam-Dex network, including government benefits, will be reproducible improve accountability.

The Central Bank of Jamaica recently problematic a total of around six million Jamaican dollars or US$44,000 to two major banks to test the Jam-Dex network in real-world conditions before its official debut.

Customers wishing to use Jam-Dex must sign up for a digital wallet and make a deposit through an accredited Jamaican financial institution.

Problems faced by the unbanked in Jamaica

Because of their avoidance of regulated financial institutions, many unbanked Jamaicans are missing out on advanced socioeconomic opportunities. For example, some government and non-profit aid programs use regulated financial institutions to distribute financial aid. Since bank accounts are not available to the unbanked, many of them are left out.

Speaking to Cointelegraph, Daniel Polotsky, the founder of CoinFlip, the largest Bitcoin (BTC) ATM network in America, said:

“Users who want to open traditional bank accounts go through lengthy approval processes and typically expose themselves to potential overdraft fees or other hidden costs that they often cannot afford.”

Another problem faced by the unbanked banks is their reliance on exploitative sources of credit. Many of them are likely to take out payday loans since they do not have access to formal credit institutions. Payday loans are incredibly expensive to finance.

1,000 Jamaican Dollars banknote featuring former Prime Minister Michael Norman Manley. Source: Bank of Jamaica.

Many Jamaicans are addicted to such services because of the easy access to credit especially in emergencies. This ultimately leads to a vicious cycle of borrowing.

The lack of a credit history among the unbanked in Jamaica further contributes to their economic segregation. Credit history is typically required by employers, insurance companies, and landlords when seeking assistance and compensation. Because unbanked people rarely have these records, they cannot get the help they need.

Many unbanked people also lack significant savings, and when they do, they keep the funds in unsafe places, usually at home. This makes the money more vulnerable to risks such as theft.

The Jamaican CBDC aims to provide financial services to the unbanked and help them overcome many of the problems mentioned above.

Greater inclusion with a CBDC

The Jamaican digital currency will be disruptive to Jamaica’s financial sector, especially for its unbanked citizens.

The financial inclusion of unbanked Jamaicans requires the implementation of a radical financial system that encourages inclusivity, and Jam-Dex has the necessary attributes to make that happen.

Polotsky highlighted the importance of such CBDCs:

“Central bank digital currencies like those of Jamaica are an important step in building widespread digital currency familiarity. They also offer both the banked and the unbanked the ability to hold and send cash digitally, at a lower fee than traditional banks, which can be crucial. Although they will not replace cryptocurrencies, these currencies can seamlessly coexist in our digital world.”

He also stated that the new Jamaican digital currency would help popularize the use of prime deflationary cryptocurrencies like Bitcoin, which are typically used to hedge against inflation.

Using the digital currency would allow relevant government agencies to monitor purchases of subsidized goods and spot price anomalies.

Set consumer prices and fight price gouging

The launch of the Jamaican digital currency will allow the government to counter price cartels, particularly in cases where price regulation is required. Such scenarios usually occur when government subsidies cover certain products.

In recent years, Jamaican lawmakers have had to act quickly to enact legislation to prevent price cartels, especially in times of disaster. Price gouging across the nation is particularly rampant during hurricane season, when opportunistic traders raise the prices of building materials such as lumber, tarpaulin, and zinc sheet.

During the outbreak of the COVID-19 pandemic, disinfectants, hand sanitizer and masks have been targeted by Jamaican price-gouging cartels, forcing the government to intervene. Fines of up to Jamaican dollars 2 million, or US$13,066 at the time of writing, have been imposed imposed at retailers who have proven to be price drivers.

Of course, reviewing every reported case of price gouging is a time-consuming process. The Jamaican digital currency will make it easier for authorities to verify such reports by analyzing point-of-sale records on the blockchain.

combat money laundering

Jamaica had a Basel AML Index Result from 5.77 in 2021. The country’s index has been on a downward trend since 2017. The current rating means Jamaica is highly vulnerable to money laundering and terrorist financing schemes. The composite index score takes into account numerous factors, including the country’s level of corruption, its financial standards, compliance with the rule of law and political disclosure.

In 2020, Jamaica was added to the European Union’s blacklisted countries after the EU found that Jamacia’s anti-money laundering (AML) protocols were missing.

The country was also added to the Financial Action Task Force’s gray list, a move that resulted in Jamaican merchants and customers being blocked from transacting on major international retail platforms.

The launch of Jamaica’s digital currency is expected to improve transaction transparency and help the nation overcome its current AML woes.

More effective monetary policy

The launch of Jamaica’s digital currency will allow the country’s central bank to track transactions with the aim of improving monetary policy.

For example, the central bank would be able to determine aggregate credit scores versus debt when formulating relevant regulations.

James Bond Beach in Oracabessa.

CBDC surveillance will also help authorities crack down on companies involved in tax evasion schemes. This is thanks to Jam-Dex transaction traceability.

The Jamaican digital currency will bring many benefits to the Caribbean island nation. However, due to opposition from politicians and a population fearful of state surveillance, adoption is likely to take a long time.

Some politicians have already accused the Jamaican government of bribery after it recently announced a $2,500 bounty for the first 100,000 Jam-Dex users.

The full launch of the Jam-Dex digital currency is expected to take several years due to teething problems.