Digital dollar could benefit all interestsWednesday, April 21, 2021
In the final article of this series, I take a “non-financial analyst” look at the effect that a Central Bank Digital Currency (CBDC) will have on commercial banking, payment services and customers.
The digital Jamaican dollar will create a new payment system paradigm, especially related to retail payment services and international transfers, such as remittances. Currently, commercial banks monopolise local retail payment systems. With CBDCs, more players will provide innovative payment solutions for both the banked and unbanked. Many of these offerings will boost economic activity. This new landscape of payment services will also allow peer-to-peer payments and more diversified payment options.
Effect on commercial banks
Depending on the implementation of our CBDC regime, the role of commercial banks could fundamentally change. Early indications are that the Bank of Jamaica will issue CBDCs through commercial banks to reduce risk and exposure associated with direct interface with the general public. However, it would make for an interesting situation as, where the use of CBDCs increases in popularity, commercial banks may find it hard to justify exorbitant fees associated with traditional currency operations. Such a situation could undoubtedly affect their profits, and commercial banks will then have to find alternative ways of shoring up their bottom line. There could be an increase in the cost of some traditional services such as automobile loans.
In an overly simplified explanation, traditional central bank money (cash) is only useable in the local context. As such, international/cross-border transactions involving an exchange of currencies can be an extraordinarily complex undertaking for financial institutions and systems. This complexity equates to high-cost transactions, which are invariably borne by the customer. CBDCs, when properly implemented, will see a more efficient approach to these types of transactions, both regionally and internationally. Costs will be significantly reduced for international transactions since these would be occurring in near real-time. While this works for the consumer, it may again impact negatively on the profit margins of commercial banks. Hopefully, the new laws for the digital dollar operation will aim to protect the interests of all players.
Trevor Forrest is CEO, 876 Solutions and a Certified Blockchain Architect with over 29 years of experience in the IT Industry in Jamaica and overseas.
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