How the Eastern Caribbean Central Bank is digitizing its dollar

The Eastern Caribbean Central Bank plans to launch a pilot in 2020 of a blockchain-based digital version of the Eastern Caribbean dollar. This marks the first time that a central bank will have issued digital legal tender using the blockchain.

Like other Latin American and Caribbean central banks, the ECCB wants to expand financial inclusion. But whereas Brazil, Mexico and Peru’s central banks are creating digital payments schemes based on existing infrastructure, the ECCB is developing a new platform.

Other central banks, such as Sweden’s Riksbank, Banco Central del Uruguay, and Bank of Canada, have investigated central bank digital currencies but haven’t proceeded to implementation yet.

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Last year, the Bank for International Settlements advised central banks to “carefully weigh the implications for financial stability and monetary policy of issuing digital currencies”. It said a general-purpose central bank digital currency could impact bank deposits, a major source of funding for commercial banks. CBDC benefits may be limited if fast, efficient private-sector retail payment systems are already in place or in development, it added.

"A digital currency could help enable financial inclusion, but by itself wouldn’t be sufficient," said Elizabeth McQuerry, leader of Glenbrook Partners’ global payments practice. "It has to be viable within payment systems that have low costs and extensive use by the poor.”

Introducing a digital currency also requires the deployment of acceptance infrastructure, consumer education and cash-in/cash-out points, said payments industry expert Francesco Burelli.

“Digital currencies have to be simple to use and solve a major unaddressed need, otherwise adoption can take significant time," Burelli said. "M-Pesa and Alipay are examples of solutions achieving rapid success as they solved a pressing need in a simple manner. But they aren’t easy to replicate.”

The Digital Eastern Caribbean Dollar (DXCD) will be distributed to licensed bank and non-bank financial institutions in the Eastern Caribbean Currency Union, which comprises eight islands including Dominica, Grenada, and St Kitts and Nevis.

The DXCD pilot will involve FIs, consumers and merchants on at least three islands, and will last six months. It will use a permissioned and private blockchain platform based on IBM Hyperledger Fabric and built by Barbados-based fintech Bitt.

The ECCB began the 12-month development and testing phase of the pilot last month in a closed environment within its offices.

In the trial, DXCD will be used for consumer-to-business payments and P2P transfers on smartphones. For example, someone in one island could send DXCD to someone in another island in seconds, at no cost. Merchants will have the option of providing cash-in/cash-out services for DXCD users.

The ECCB sees opportunities to use digital currency to widen financial inclusion and cut the cost of cash usage.

The ECCB doesn’t intend to eliminate cash, but wants to reduce the region’s use of cash and checks, said Timothy N. J. Antoine, the ECCB’s governor, in a statement. “In the ECCU, about 80% of all payments use cash or checks,” he said.

Consumers will have to provide a national ID and proof of address when applying for a fully transactional DXCD mobile wallet. However, unbanked consumers can obtain mobile wallets with limited transactional capability without government-issued ID. Following the development phase, the ECCB aims to integrate its DXCD platform with banking and payment systems in the Eastern Caribbean.

Eastern Caribbean small businesses pay credit card merchant fees of up to 3.5% per transaction. Merchant fees for DXCD transactions will be “a fraction of the cost” of accepting credit and debit cards, Bitt’s CEO Rawdon Adams said in a statement.

The ECCB selected Hyperledger Fabric as it is an open source, private permissioned blockchain with strong identity management. “Hyperledger Fabric’s private blockchain gives the ECCB the ability to control who can access the network, submit to and read the ledger of verified transactions, and who can verify (transactions),” Antoine said.

“The DXCD’s significance is that the ECCB plans a full rollout, not a limited test,” said Jeffrey Bower, principal of Bower & Partners Consulting Services. “The ECCB’s approach contrasts with other Latin American and Caribbean central banks, which rely on existing architecture and payments methods to promote innovation in an incremental manner. For example, Mexico is pushing mobile payments through its real-time interbank network with the QR code-based Cobro Digital (CoDi) system. Peru, Colombia, Jamaica and Haiti are pursuing similar, incremental improvements.”

In December 2018, Banco Central do Brasil announced plans for an instant payments system based on its existing settlements infrastructure, which is intended to increase mobile payments adoption.