By NEIL HARTNELL
Tribune Business Editor
A digital Bahamian dollar is "no panacea" for this nation's financial inclusion issues, the IMF has warned, especially if unreliable power supply continues to plague the Family Islands.
The International Monetary Fund (IMF), in its Article IV report, urged The Bahamas to "explore all forms of digital innovation" as a means of giving more persons access to formal financial services rather than focus solely on developing a digital fiat currency.
While the Central Bank's initiative, known as Project Sand Dollar, will undergo a six-month trial later this year in Exuma, the fund pointed out that reliable energy supply and internet connectivity - especially in the Family Islands - are vital for its success.
"By exploring all forms of digital innovation, The Bahamas can progress towards financial inclusion while avoiding risks associated with the Central Bank's digital currency," the Article IV report argued. "Financial innovation could help enhance financial inclusion throughout The Bahamas, and the widespread use of an account-based digital currency could discourage tax evasion.
"However, issuing a Central Bank digital currency is no panacea. First, insufficient infrastructure for reliable electricity and internet connectivity in smaller islands and low-income areas of bigger islands can worsen socioeconomic inequalities because of monetary digitalisation.
"Second, financial stability risks associated with the Central Bank digital currency are significant, and the current rules and regulations may need to evolve to appropriately mitigate these risks. A more efficient and inclusive financial system could also be achieved through digital innovations in existing payments and financial infrastructures."
The Central Bank has already stated that the necessary safeguards will be built into the digital Bahamian dollar's regulatory framework, as the traditional Know Your Customer (KYC) and anti-money laundering/terror financing practices will be in place. Blockchain technology will be used, with the system designed to complement the existing banking infrastructure.
Yet the IMF cautioned: "The introduction of an interest-carrying Central Bank digital currency could undermine financial stability by making commercial bank deposits more volatile. When a Central Bank digital currency becomes a substitute for commercial bank deposits, banks could experience an increase in funding costs, leading to higher lending rates.
"At the same time, higher Central Bank digital currency demand may force the Central Bank to skew the composition of its balance sheet toward more risky assets as it needs to generate higher returns. Furthermore, Central Bank digital currencies appear to be subject to fraud and cybersecurity risks that could have significant reverberations to financial stability."
To ensure Project Sand Dollar's success, the IMF urged that telecommunications infrastructure and Internet connectivity be equal across all Bahamian islands to ensure even access to electronic financial services.
"The widespread availability of mobile phones provides a reliable, well-tested platform to deliver banking and payment services across the archipelago," the Fund added. "Since the geographical reach of telecommunication operators is significantly greater than that of any commercial bank, mobile money transfer and payment applications could offer a low-cost solution to provide access to financial services.
"In many countries, mobile phone companies offer m-Wallet (short for mobile wallet) services, which allow subscribers to load cash, pay bills and transfer money to other m-Wallet accounts or bank accounts. Smart phones offer users access to a wide spectrum of fintech applications, including peer-to-peer digital wallets."