February 26, 2024

As the concept of a central bank digital currency (CBDC) gains traction amid a divided political climate in the United States, the idea is finding buying points south of the border.

A February issue Researchers at the International Monetary Fund have brought together ongoing research highlighting the progress CBDCs have made. Entitled “Crypto-assets and CBDCs in Latin America and the Caribbean,” the publication focuses on the opportunities and risks posed by the introduction of digital currencies.

Latin America is not acting as a whole when it comes to CBDCs. As the report notes, “policy responses have varied widely, from the introduction of Bitcoin as legal tender in El Salvador to the banning of Bitcoin in many other countries due to concerns about its impact on financial stability, currency/asset substitution, tax evasion, corruption, and money laundering.”

How is CBDC development going?

Only two countries in the Latin America/Caribbean region, the Bahamas and Jamaica, have fully rolled out CBDCs. The Bahamas is the first to introduce the 2020 sand dollar. The currency is for local use only, international transactions are still backed by commercial banks and use the standard Bahamian dollar.

Jamaica’s currency, the JAM-DEX, will go into circulation in July 2022 after several delays.One of the incentives to encourage the use of digital currencies is to grant JAM-DEX Bonus $2,500 Open to the first 100,000 customers who sign up for CBDC through the digital wallet and trading platform Lynk.

A dozen other countries are at various stages of development, as shown in the chart below.

Opportunities and Challenges

Much of the interest in crypto assets in Latin America and the Caribbean has to do with how much of the population lacks financial inclusion and banking services. Additionally, cross-border transactions such as remittances can be costly, a real problem for which crypto-assets and their associated technologies have potential solutions.

The potential downsides of crypto assets (called “challenges” by the IMF document) are also considerable. According to the IMF, these problems include macroeconomic vulnerabilities, historic economic instability, poor institutional credibility and corruption. There are concerns that crypto-assets could lead to currency substitution, spur illicit transactions, hinder taxation, and other issues.

These opportunities and challenges have jointly promoted central banks in the region to explore the issuance of CBDC.

The IMF document states: “CBDCs could help central banks advance technological innovations that support the development of cryptoassets, while continuing to provide a secure means of payment and a secure store of value, while also serving as a universal (and stable) unit of account.”

Analyst’s View

Joel Hugantobleran analyst Javelin Strategies & Research Cryptocurrencies The practice highlights the difficult dilemma some countries face in driving CBDC adoption.

“These programs are designed to incentivize users to transition to the digital economy. However, there are a lot of nuances along the way,” he said. “The actual rollout of these projects shows a low adoption rate – less than 8% of the population uses the new e-currency, which is pretty bad. Not to mention the number of incentives offered by the Jamaican government, the adoption rate is still low, which shows that many people are still reluctant to use it.”

As for any moves in the U.S. toward a CBDC, Hugentobler noted that the idea is highly controversial in some quarters and will need to be carefully pushed in the right direction.

“I don’t think the U.S. will launch a CBDC for at least a year or two, if not longer,” he said. “About 70% of global trade is settled in dollars and being the ‘lender of last resort’, doing it right is more important than being first.”