Dec 24, 2019 — proposed central bank digital currency (CBDC). This is a continuation of the Bahamian Payments. System Modernization Initiative (PSMI),
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2 Table of Contents 1 Executive Summary .. .. .. . 3 2 The Bahamian Pa yments System & Financial Access .. .. .. 4 2.1 Goals of the Modernisation Initiative .. .. 4 2.2 Existing Measures of Financial Inclusion and Access .. .. . 4 2.3 Baseline Financial Inclusion Data from Exuma .. .. . 6 2.4 Tailoring Financial Inclusion Intervention .. .. 7 3 Advancing Payments Infrastructure Development .. .. 7 3.1 Automated Clearing Arrangements .. .. 7 3.2 Non – Bank Dir ect Participation in Settlements .. .. .. 7 3.3 Strengthening Ease of Access to Financial Services .. .. 8 4 Project Sand Dollar .. .. .. .. 9 4.1 Key Specifications of the Proposed Solution .. .. .. 10 4.2 Monetary Policy and Financial Stability Safeguards .. .. 11 4.3 The Roles and Contribution of Key Stakeholders .. .. . 12 4.4 Tailoring the Digital Currency Experience .. .. . 14 4.5 The Digit al Payment Process .. .. .. . 15 5 .. .. .. 15 6 Gauging Potential Benefits against Costs .. .. 16 6.1 Improved Financial Inclusion .. .. .. 16 6.2 Reducing the Ill Effects of Cash Usage .. .. 16 6.3 Reduced Transac tions Costs .. .. .. . 17 6.4 Strengthened Economic Surveillance .. .. . 17 7 Education and Marketing Strategy .. .. .. .. 17 8 Conclusion .. .. .. .. .. 18 Appendix : .. .. .. .. . 19 Selected Bibliography .. .. .. .. 19 A1. Tables and Charts .. .. .. .. 20 A2. Tiered KYC Requirements. .. .. .. . 23 A3. Market Research on Exuma .. .. .. .. 27
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3 1 E XECU TIVE S UMMARY The Central Bank will introduce a digital version of the Bahamian dollar, start ing with a pilot phase in Exuma in December 2019, and extending in the first half of 2020 to Abaco. This initiative has acquired the name Project Sand Dollar, wit h the sand dollar also being the name assigned to the proposed central bank digital currency (CBDC) . This is a continuation of the Bahamian P ayments S ystem M odernization Initiative (PSMI) , which began in the early 2000 s. The Bahamian PSMI t argets improved outcomes for financial inclusion and access, making the domestic payments system more efficient and non – discriminatory in access to financial services. A lthough average measures of financial development and access in The Bahamas are high by internationa l standards, pocket s of the population are excluded because of the remoteness of some communities outside of the cost effective reach of physical banking services. More onerous customer due diligence standards for AML/CFT international tax compliance have also resulted in forms of exclusion, including more recent responses to tighter know your customer (KYC) systems introduced to preserve international correspondent banking relationships. As recent policy and regulatory reforms have begun to tackle thes e barriers, the Central Bank is intent on accelerating payments system reform, admitting new categories of financial services providers and using the digital payments infrastructure to make the supply of traditional ba n king services accessible to all segme nts of the population. Recent surveys document that as part of a financial literacy campaign, there is room to improve both knowledge and awareness of financial products and responsible financial behavior. Opportunities also exist to reduce transaction cost s for businesses and consumer s . Feedback from Exuma, show a high penetration of mobile phone usage, and a likelihood that a higher share of the population would be willing to use digital financial services including electronic payment s . The public th ough will need more assurances around the safety of conducting online transactions. The digital currency design and public education will tackle these issues. Most of the benefits of introducing a digital currency are still unquantifiable. However, they include a potential suppression of economic costs associated with cash usage, and benefits to the G overnment from improved expenditure and tax administration system s . It is expected that the Government, as participant and user , would be a strong promoter of digital payments adoption, along side non – bank payment services providers as the initial lead intermediaries in this space.
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4 As the pilot progresses in Exuma, the Central Bank will simultaneously promote the development of new regulations for the digital currency, and strengthen consumer protection, especially around data protection standards. The Ba nk will also advance reforms to permit direct participation of non – banks in the domestic payments system. Early passage of the new Central Bank of T he Baham as Bill will support the creation of some regulations, while additional reform s will be possible under the existing Payment Systems Act. 2 T HE B AHAMIAN P AYMENT S S YSTEM & F INANCIAL A CCESS 2.1 Goals of the Modernisation Initiative The Bahamian Payment s System Mode rnisation Initiative (PSMI), of which the digital currency project is a recent component, targets collectively improved outcomes around financial inclusion and access, making the domestic payments system more efficient, non – discriminatory in access to fina ncial services across the entire archipelago. The main goals are that 100% of the popul ation has access to digital payments services; universal access to banking services of a deposit account maintenance nature; a reduction in the size of legitimate but u nrecorded economic activities that take place in the informal sector; and full admission of micro, small and medium – sized businesses into the digital space. The positive outcomes are also explicitly aimed at strengthening national defenses against money la undering and other illicit ends, including activities that thrive in cash intensive environments. More universally enabled access to electronic payments and to digital financial services also dovetails with the strategy to deliver government services throu gh digital channels, thereby improving tax administration and increasing the efficiency of spending. 2.2 Existing Measures of Financial Inclusion and Access Average measures of financial development and access, mask the archipelagic disparities in access to basic financial services , and similarly highlight the costly nature of delivering services th r ough physical channels in The Bahamas . Relative to the size of the economy, the domestic deposit base of approximately $6 . 5 billion and outstanding credit to the private sector at $6 . 2 billion equate to respective 60.5% and 57.9% of GDP in 2018 . R elative to the size of the population , T he Bahamas has the 35th highest density of bank branches in the world and the 15th highest density of automated banking machines . H owever, there are significant gaps in who has access. 1 G iven the dispersed geography , with pockets of sparse population s , many rural , Family Island communities have limited or no access to these physical modes of delivery, with 1 See IMF Financial Access Survey d atab ase . https://data.imf.org/?sk=E5DCAB7E – A5CA – 4892 – A6EA – 598B5463A34C .
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5 services being totally unav ailable, or only t hrough electronic channels . Moreover , the branch network has been scaled back in response to the rising costs of maintaining such operations . When coupled with other diffic ulties in establishing banking relationship s , the se pockets of the Bahamian domestic environment therefore remain captive to sole reliance on cash transactions , with consequent exposure to opaque or illicit activities that thrive in such settings , and with costs particularly to the public sector to deliver ca sh – based ass istance or payments . The domestic financial system has also discriminated in access through both official policies and the in – house practices of licensed institutions. Even as policies have been relaxed, the system has only transitioned gradually to a mor e accommodating state, as anecdotal feedback from the 2018 and 2019 reforms underscore. 2 T he 2001 suite of legislation that address ed global anti – money laundering (AML) concerns and subsequent year s strengthening of the Bahami a n internation al tax cooperat ion arrangements introduce d onerous customer due diligence system s that effectively excluded or slowed basic financial access . 3 Customer due diligence standard s also tightened , in more recent years , as commercial banks responded to more demanding terms on correspondent banking relation ship s (CBRs) . This followed international assessments that placed the Bahamian AML/CFT regime at higher risk. Until 2018, Exchange Control Regulations also maintained broad exclusions on non – llar deposit accounts, when these might have facilitated domestic payments transactions. 4 Additional evidence on financial inclusion were obtained from a baseline survey conducted in 2018 , 5 similar to other surveys used for OECD countries. This highlighte d the gap between which financial products were utilized , versus those of which they were made aware . The survey 6 indicated both a high degree of awareness and access to basic deposit facilities in The Bahamas, although that has not translated into increa sed level of use of such products. About 93 % of the surveyed person s ha d knowledge of savings account s and 85 % knew of checking account s compared to a lesser 80 % and 70 % of the same individuals who used such instruments. Further from a payments perspect ive , only 48 % of individuals had access to credit card facilities, against awareness of these by 89 % of those surveyed . Other measures of inclusion also exposed gaps, 2 Banks did not all implement the adjusted customer due diligence standards at the same time. 3 Just up to 2018, a common requirement to establish a personal deposit account at domestic bank was for the applicant to produce multiple forms of official identification, evidence of employment and proof of physical address. Risk – based application of procedures that would have eased constraints on the majority of domestic clients started to be endorsed in the 2018 legislative reforms. 4 Evidence of a permit to reside or work in The Bahamas was a requirement in order for a non – resident to maintain a Bahamian dollar deposit account. 5 The Bahamas Financial Literacy Results 2018 https://www.centralbankbahamas.com/news.php?id=16402&cmd=view 6 See a snapshot of the results in the appendix .
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6 in the use of investment and insurance products , including pension s ( see T able 1 in the Appendix ). self – exclusion from banking services partly because of the customer due diligence requirements, and in the case of businesses , exclusion from use of electronic transactions because of the cos ts. In particular, in cases where individuals reported not having a bank account, some indicated that it was due either to the inability to , or the inconvenience of satisfying KYC documentary requirements. Meanwhile, anecdotally, b usiness es that either r eported not accepting electronic payments or still had a preference for cheque writing as opposed to wired payments , commonly cite d the cost s of the electronic options as an i nhibiter . 2.3 Baseline Financial Inclusion Data from Exuma In the Summer of 2019 , th e Central Bank also conducted a targeted baseline survey on financial inclusion and access for Exuma , alongside new data for the rest of The Bahamas , which provides a context for consumer education and awareness and tracking financial inclusion measures as the pilot progresses. 7 The results also highlight room for increase d use of digital financial transactions once costs, ease of use and cyber security concerns are addressed. The Exuma results , which are summarized in the Appendix, underscore high access t o basic bank against participation in savings account s for slightly more than 9 out of 10 persons on average in the survey , with both result s potentially elevated due to the surveys being conducted over land phone lines, and potential exclusion of undocumented persons. Additionally , the Exuma survey indicates that some two – thirds of bank accounts receive deposits that originate from salary payments, and about 15% r eceive pension payments. Where bank accounts were not use d , lack of trust in the institutions or the inconvenience of getting to a bank were the most cited reason s for self – exclusion ( collectively for 17% of those without accounts ) . About 96% of surveyed Exumians own mobile devices, and about 40% use these to perform some forms of bill payments or online banking transactions. Close to two – thirds of respondents disclosed a willingness to use mobile devices for payments or commercial transactions in the fut ure. When disclosed, there was a reluctance to use electronic banking and financial transactions, which was skewed more toward older respondents, and mostly reflect ing unease or distrust with electronic platform s , including cyber security concern s . Ane cdotally , the Central B ness to embrace electronic payments on either the receipting or disbursing end, has been inhibited by costly merchant fees. 7 The national survey results are being published separately.
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8 supporting Payment Instruments (Oversight) Regulations were introduced in 201 7 , the Central Ba n k began to accept license applications for non – bank providers of payment services providers (PSPs) . These entities can operate in the same markets for stored – value products as banks, credit unions and money – transmission businesses (MTBs). There have already been three licensed PSPs , with other applications under review . S everal MTBs are also developing digital payment s s olutions under the regulatory oversight of the Central Bank . The draft new Central Bank legislation contains provisions that would level the playing field ev en further . The Bank has signalled that it will allow direct participation of non – clearing banks i n the ACH and RTGS systems . Regulated cre dit unions, international banks, PSPs and would be permitted to establish settlement accounts directly with the Central Bank as opposed to having to negotiate settlement arrangements with c ommercial b anks. T he Central Bank has also proposed that the Government and the National Insurance Board would be allowed to join the ACH and RTGS, as the two largest single originators and recipient s of payments . Both entities already maintain accounts with the Central Ba nk that can satisfy settlements . O pening of the ACH to broader participation will require regulations, and commercial bank initiated changes in the private ACH arrangements. 9 3.3 Strengthening Ease of Access to Financial Services Throughout recent regulatory reforms, the Central Bank was also guided by the principle that access to payment services should not discriminate between whether the products originate from banks or from other regulated entities; and that the range of access that users of cash currently enjoy in services should persist when the products were digitised. Also, irrespective of whether consumers avail ed themselves of mobile payment services or traditional bank deposits, the Central Bank has taken the stance that the ease of access and risk t ailored customer due – diligence should be similar. On ease of access, streamlined customer due diligence standards were introduced in 2018 under revised AML Guidelines 10 which simplify the identification and address verification requirements to establish per sonal deposit accounts or access other services from financial institutions. A passport is now sufficient to open a bank account ; or two other pieces of identification in the absence of passport. This shifts more emphasis to transactions monitoring process after account relationships have been established , and limits enhanced due diligence to customer s which banks 9 The PSA allows the Central Bank to designate certain parts of the domestic payments system as systemically important and, as a result, to impose additional regulatory conditions on their operations. This would include access to such parts of the system on a non – discriminatory basis for other payment services firms. 10 Streamlined Requirements for Account Opening https://www.centralbankbahamas.com/legal_policies.php?cmd=view&id=16883
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9 assess to be of higher risk. For very low – value stored products , the identification process need not be invoked . 11 The Central Bank also signall ed that a job letter or proof of employment would not be a requirement to open a personal deposit account. This affects the cross – section of the resident adult population who might not be employed, but would be entitled to transaction accounts, such as sa vings facilities with deb i t cards attached. The other easing, which the Central Bank undertook in 2018 , was to remove Exchange Control restrictions from non – resident access to Bahamian dollar (B$) deposit facilities. Irrespective of immigration or work p ermit status , these persons can open and maintain B$ deposit accounts with balances of up to $50,000 without approval from the Central Bank. To progress beyond these regulatory steps , the Central Bank recognised that , in The Bahamas , s still existed, even where the same circumstances might produce strictly private sector efficient solutions in larger developed or developing country settings. Outcomes still have to ensure that all pockets of the archipelago are serviced by the private sector solutions that emerge. Also, the solutions should connect all consumers regardless of the consumers choice of service provider. It is an interoperability requirement, that for The Bahamas would only be achieved swiftly if it were universally prof itable. As proposed, the digital currency solution would eliminate this constraint . 4 P ROJECT S AND D OLLAR The intended outcome of Project Sand Dollar is that all residents in The Bahamas would have use of a central bank digital currency , on a modernized tec hnology platform , with an experience and convenience legally and otherwise that resembles cash . It is expected that this will allow for reduced service delivery costs, increased transactional efficiency, and an improved overall level of financial inclusio n . The anonymity feature of cash is not being replicated, although the Sand Dollar i nfrastructure would incorporate strict attention to confidentiality and data protection. A digital fiat currency would not be p rivate instrument s in existence. It would be an identifiable liability of the C entral B ank of The Bahamas , equivalent in every respect to the paper currency. Its value would be the same as the existing currency. The digital currency would also not be a stable coin, or a parallel currency , in the sense that it would not derive any value separate from the external reserves backing afforded to the 11 In the AML Guidance Notes these would be accounts that carry $500 or less and for which the monthly reload capacity is $300 or less. Monitoring of transactions for AML purposes, still applies for all accounts which financial institutions maintain. Where higher risks are assessed , supervised institutions may also invoke processes that go beyond identification, such as verification of sources of income or wealth.
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10 4.1 Key Specification s of the Proposed Solution T he Central Bank undertook a rig orous process to select a technology solutions provider for the design and implementation of the digital fiat for The Bahamas. The search process stressed a need for a robust solution that address ed both the archipelagic and infrastructural challenges of providing electronic financial services, as well as the requirement to provide a solution that was robust against international regulatory standards. In March 2019 , NZIA Limited was selected as the solutions provider . A few key aspects of the proposed so lution are as follows : Achieving i nteroperability among existing and new channels for the provision of payment s services . All payment s services firms would have access to the digital currency and would be able to use the S and D ollar N etwork to settle reta il Bahamian dollar payments. Supporting o disconnected . Built – in safeguards would allow users to make a pre – set dollar value of payments when communications access to the Sand Dollar N etwo rk was disrupted. Wallets would update against the network once communications were re – established. Near instantaneous validation of transactions/real – time transactions processing . Point of sale support for businesses accepting payments . Through PSP tail ored solutions, b usiness would be able to process payments with modern credit and debit card machines or mobile phone apps. Fully auditable transactions trai l (non – anonymous ). Transactions monitoring still protects user confidentiality, and would be gover ned by strict regulatory standards around access. Monitoring for fraud detection . Restriction of digital currency to domestic use. A Bahamian CBDC would be for domestic use only , and prohibited from acceptance by non – domestic payees . W allet holders would still have the option , through PSPs , to integrate accoun ts with commercial banks, to make electronic purchases of foreign exchange, enabling use of their accounts internationally. Multi – factor authentication for wallet users . Users would have to supply two passcodes, one randomly generated, to complete some payments transaction s . Digital ID solution (using KYC and identity features incorporated in the system design) that can be piloted for use in the financial services sector.
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11 The digital version of the Bahamian dollar would be availabl e for both wholesale and retail applications. Wholesale application would ordinarily restrict usage to payments settlements at the inter – bank level, akin to clearing house transactions. The proposed retail application, w ould also allow the general public to make and receive digital payments. Each holder would maintain direct claims on the C entral B ank and legally have the equivalent of accounts with the Central Bank . Over the pilot phase, the Central Bank will work along with the technology provider to ensure that all the relevant facets of the digital system are fully functional before it is more widely deployed. T he pilot will launch in Exuma in December 2019 and expand to Abaco in the first half of 202 0 . The Abaco sett ing will test emergency wireless communications features that would enable rapid financial services recovery following natural disasters ; and connect with retail businesses e arly in their recovery process. 4.2 Monetary Policy and Financial Stabili ty Safeguards The Bank is closely attentive to the monetary policy and financial stability implications of a digital currency and is incorporating prudent safeguard s for these . 12 , 13 These go beyond customer due diligence and transaction s monitoring standard s that tackle financial crimes (money laundering, terrorism financing, a nd proliferation) and tax evasion. O ne concern is that a CBDC could compete with traditional banking services, as a deposit alternative and draw resources out of banks . If it were to happen on any significant scale, it would leave the issuing central bank in the suboptimal position of having to reallocate domestic resources , a role that is best reserve d for licensed financial institutions . 14 A consideration too is whether holdings of digital currency would earn interest, which would be an other reason for the public to view them like deposits. Financial stability risks would also be highlighted by concerns that sudden, large shift of funds into CBDCs could present a form of bank run. Early international regulatory caution around issuance of 12 The policy considerations and risks of CBDCs has been extensively documented by organisations such as the Bank for International Settlements (BIS), International Monetary Fund (IMF) and the Financial S tability Board (FSB). The Financial Action Task Force, has weighed in on recommended standards to counter financial crimes abuse. See the Appendix for a selected bibliography. 13 That said , official sentiments towards CBDCs has shifted. A BIS Survey indi cated that 70 percent of all central banks were exploring some work on CBDCs. T he Bahamas and Eastern Caribbean Central Bank, are in this subset, both inten ding to make the digital currency available to the general public (a retail version). Many other c entral banks are only exploring issuing wholesale CBDCs that would be restricted for use in payments settlement s among financial institutions. There is also the apparent competition from potential global stable coins like the pro po sed Facebook libra that h as drawn global reaction from standards setting bodies and regulators. Regulators acknowledge that the rise in popularity of cryptocurrencies were in measure responses to gaps in the efficiency and reach of the international payments settlement mechanisms , especially for low – value transactions like remittances. 14 Adrian, Tobias; Mancini – Washington, D.C., July 2019.
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