Casey Wagner

<div id="highlights-block_62a3a31b85428" class="highlights">
 <ul>
 <li>IMF report suggests countries, crypto infrastructure providers move away from proof-of-work-based CBDCs</li>
 <li>CBDCs should be better for the environment than existing systems, analysts said</li>
 </ul>
 
</div>



A new study from the International Monetary Fund urges countries looking to develop CBDCs to consider energy consumption when making their design choices.



Central banks should “design CBDCs [central bank digital currencies] with the explicit goal to be environmentally friendly,” the IMF said in the <a href="https://www.imf.org/en/Publications/fintech-notes/Issues/2022/06/07/Digital-Currencies-and-Energy-Consumption-517866" target="_blank" rel="noreferrer noopener">report</a>. The payments system broadly, including central banks’ legacy systems, uses a large amount of energy, and moving toward renewables across the entire financial sector should be the goal, IMF analysts added.&nbsp;



“What we are seeing now is a broader realization that if CBDC is going to be an infrastructure, it has to be better than the one we have,” Carmelle Cadet, CEO of CBDC infrastructure provider EMTECH, said. “In addition to processing payments faster, with easier traceability and trust, CBDC has to be energy efficient.”&nbsp;



“Major cloud service providers are shifting toward renewable sources of energy such as geothermal and hydropower, as well as toward locations with colder climates, to reduce the carbon footprint in generating power,” the report read. “Adding the environmental footprint as a selection criterion of a cloud partner can benefit not only the CBDC project, but also any future digitization project of a central bank.”&nbsp;



The IMF also recommends that countries and crypto companies move away from energy-intensive proof-of-work protocols, a suggestion some say could impact user experience.&nbsp;



“Different protocols focus on various priorities…you have trade-offs that might not align to energy efficiency,” Cadet said.



The report comes as more nations, particularly developing countries, make strides toward launching their own CBDCs, which advocates say can drastically improve the lives of those living in predominantly cash-driven societies.&nbsp;



“Providing a cash-like digital means of payment, in light of reduced cash usage and an increase in private digital payment services, is the most common consideration [for developing a CBDC],” a recent report from the <a href="https://www.bis.org/publ/bppdf/bispap123.htm" target="_blank" rel="noreferrer noopener">Bank for International Settlements</a> said. “Other significant considerations include strengthening competition among payment service providers (PSPs), increasing efficiency and reducing the costs of financial services.”&nbsp;



Jamaica <a href="https://cms.blockworks.co/in-historic-move-jamaica-makes-cbdc-akin-to-cash/" target="_blank" rel="noreferrer noopener">has already approved</a> its upcoming CBDC as legal tender in the nation. Brazil, Nigeria and Haiti are among the jurisdictions exploring the establishment or expansion of CBDCs. The Central Bank of the Bahamas’ Sand Dollar became the world’s first CBDC in 2020.



With environmental, social and governance-focused investing and climate change at the front of many minds, it is not a surprise that the IMF is choosing to focus on how digital assets impact the environment, according to another CBDC expert.&nbsp;



“Central banks are thinking about energy, and they should be thinking about energy,” said Jonathan Dharmapalan, CEO of eCurrency, which provides technology for central banks to issue and distribute CBDCs. “Energy efficiency is not just about how to do this with digital currency, it is also about the lack of energy efficiency and moving physical currency, which is also an issue.”



Correction: An earlier version of this story featured an image of Christine Lagarde, who was the Managing Director of the IMF until 2019 when she became the President of the European Central Bank.



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Consider the Environment When Designing CBDCs, IMF Urges

<div id="highlights-block_62a0fc2266809" class="highlights">
 <ul>
 <li>Jamaica’s central bank officially recognizes a digital Jamaican dollar as legal tender</li>
 <li>It is the first time in history a country has passed this type of legislation</li>
 </ul>
 
</div>



In a move to offer an alternative in a cash-heavy economy — and buttress the finances of the unbanked — Jamaica has become the first country to render a CBDC legal tender.



Jamaica’s senate authorized the country’s national bank to issue its CBDC (central bank digital currency), the Jamaica Digital Exchange, or Jam-Dex, via an amendment. The fresh legislation expands the definition of legal tender to include virtual tokens, as well as physical notes and coins.&nbsp;



Jam-Dex, which has been in a pilot since 2021, will launch officially for domestic use later this month, Central Bank of Jamaica Governor Richard Byles told Blockworks.



The CBDC is expected to significantly limit the challenges associated with Jamaica’s primarily cash-driven economy. A digital Jamaican dollar offers a more secure, convenient alternative to physical notes and coins, Byles said — and can be used without a bank account.&nbsp;



“Legislators in Jamaica have all now unanimously moved a digital dollar forward in Jamaica,” said Jonathan Dharmapalan, CEO of eCurrency, which provides technology for central banks to issue and distribute CBDCs. “You can use this to settle any debt in Jamaica. It is the medium of exchange. It is the medium of account.”&nbsp;



The success of the pilot, Dharmapalan said, proved Jam-Dex’s underlying technology and infrastructure works, but seeing citizens use the currency in the real world in the coming weeks and months will demonstrate the true value of CBDCs.



“What is primarily important is that countries start to recognize that their money can come in digital form,” he said. “Because it&#8217;s digital, you don&#8217;t have to be in the same place at the same time to execute a transaction…It&#8217;s a really, really powerful tool.”



While Jamaica is the first country to make CBDCs akin to cash, it is <a href="https://cms.blockworks.co/why-emerging-markets-are-leading-the-charge-on-cbdcs/" target="_blank" rel="noreferrer noopener">not the only government</a> looking into the technology. Brazil, Nigeria and Haiti are among the jurisdictions exploring the establishment or expansion of CBDCs. The Central Bank of the Bahamas’ Sand Dollar became the world’s first CBDC in 2020.



Emerging markets looking into CBDCs have similar goals and motivations, the Bank for International Settlements said in a May <a href="https://www.bis.org/publ/bppdf/bispap123_a_rh.pdf" target="_blank" rel="noreferrer noopener">report</a>.



“Providing a cash-like digital means of payment, in light of reduced cash usage and an increase in private digital payment services, is the most common consideration,” the report said. “Other significant considerations include strengthening competition among payments service providers (PSPs), increasing efficiency and reducing the costs of financial services.”



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In Historic Move, Jamaica Makes CBDC Akin to Cash

<div id="highlights-block_628fba706c69f" class="highlights">
 <ul>
 <li>Emerging markets see potential in central bank digital currencies for increasing financial inclusion and decreasing cash dependency</li>
 <li>Infrastructure and privacy concerns continue to be top barriers</li>
 </ul>
 
</div>



With more than half of central banks worldwide working on digital currency initiatives, the US dollar-dominated payment network may in relatively short order become a thing of the past, according to the <a href="https://www.bis.org/publ/bppdf/bispap123.htm" target="_blank" rel="noreferrer noopener">Bank for International Settlements</a>.&nbsp;



Emerging markets are at the forefront of the central bank digital currency (CBDC) movement, industry leaders say, a trend attributed to these economies having more pressing, fundamental needs than those of more developed markets.&nbsp;



“Emerging economies appear to view CBDCs as a way to jump start their economies,” said Steve Aschettino, a Norton Rose Fulbright partner concentrating on fintech. “More-developed nations have existing and widely adopted electronic payment mechanisms already in place. While one may say this is an advantage, their existing payments technology can also serve as a barrier to the creation and broad adoption of a CBDC.”



Emerging markets looking into CBDCs have similar goals and motivations, the BIS said in a <a href="https://www.bis.org/publ/bppdf/bispap123_a_rh.pdf" target="_blank" rel="noreferrer noopener">report</a> earlier this month.&nbsp;



“Providing a cash-like digital means of payment, in light of reduced cash usage and an increase in private digital payment services, is the most common consideration,” the report said. “Other significant considerations include strengthening competition among payments service providers (PSPs), increasing efficiency and reducing the costs of financial services.”&nbsp;



<a href="https://cms.blockworks.co/jamaica-to-launch-cbdc-this-summer/" target="_blank" rel="noreferrer noopener">Jamaica</a>, Brazil, Nigeria and Haiti are among the countries currently looking into establishing or expanding CBDC pilots. For cash-driven economies such as Jamaica, CBDCs allow for cheaper, safer and more efficient transactions, Central Bank of Jamaica Governor Richard Byles said.&nbsp;



“If you can imagine what it costs a business, especially a high cash-volume business, to manage that cash: to keep it, to store it, to transport it — digital currencies get rid of all that,” Byles said in a recent interview.



CBDC infrastructure provider EMTECH has worked with the Bank of Ghana, the Central Bank of the Bahamas and the Central Bank of Nigeria on CBDC infrastructure projects in recent years. The company most recently partnered with HaitiPay, a Haitian fintech company, to demo a CBDC and fintech proof-of-concept in the region. The goal was to showcase the impact a CBDC can have on the Haitian economy, according to Carmelle Cadet, founder and CEO of EMTECH.  



“Being born and raised in Haiti, I have a view of how many people are unbanked and underbanked,” Cadet said. “When I discovered what blockchain was, I realized that there was a solution that could bypass where people are from and how much money they had and get them access to better financial resources.”&nbsp;



Although interest in digital currency has grown, most CBDCs are still in early pilot stages, and those that have progressed further are not yet widely used, said Kenneth Goodwin, director of regulatory and institutional affairs at Blockchain Intelligence Group. The Central Bank of the Bahamas’ Sand Dollar, which became the world’s first CBDC in 2020, has faced distribution issues, he said.



“I speak to John Rolle, who is the head of the Central Bank of the Bahamas, he&#8217;s not a big fan of the idea of all of this, quite frankly,” Goodwin said. “His job has become a lot more challenging because he&#8217;s taking this digital asset and trying to find a way to implement that into the system where they used to have a fiat currency.”&nbsp;



A huge benefit of CBDCs for central banks, Goodwin said, is the ability to better understand where — and how — people are spending. The transparency, of course, brings up privacy concerns as well.&nbsp;



“Anytime you digitize any platform, you&#8217;ll increase both cybersecurity risk and data privacy risk,” Goodwin said. “Data privacy is very, very key in terms of who owns the data, whether that data is being owned by the individual or is being owned by the central government, and that is a huge issue.”&nbsp;&nbsp;



Infrastructure is also a key concern, Aschettino said. Limited broadband access in many countries looking into CBDCs can significantly limit distribution, he said.&nbsp;



“These countries have to do a full assessment first to see that the citizens have access to the internet,” Goodwin said. “They&#8217;re going to have to do an assessment first and not get caught up with the technology, which is what often happens, they get caught up with the technology, but they don&#8217;t think about the infrastructure.”



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Why Emerging Markets Are Leading the Charge on CBDCs

<div id="highlights-block_6279894780c60" class="highlights">
 <ul>
 <li>Jamaica first announced the Jam-Dex pilot program in 2021</li>
 <li>The Caribbean country is using a CBDC model that the Federal Reserve has expressed interest in</li>
 </ul>
 
</div>



Following its successful pilot program, Jamaica’s central bank digital currency is set to become publicly available this summer, Central Bank of Jamaica Governor Richard Byles told Blockworks.



Known as the Jamaica Digital Exchange, or Jam-Dex, the CBDC is intended to make the lives of business owners and consumers easier, Byles said. Jamaica’s economy is primarily cash driven, and a digital Jamaican dollar offers a more secure, convenient alternative.&nbsp;



Jamaica first announced the Jam-Dex pilot program in 2021 with the tagline “no cash, no problem.”



“We spend in excess of $7 million US dollars a year, just replacing notes of all kinds, and that&#8217;s just us. Everybody has to spend money on cash, every business has to spend money on cash.”



The efficiency gains that come with a CBDC will save the government and business owners money, Byles said.



“If you can imagine what it costs a business, especially a high cash-volume business, to manage that cash, to keep it, to store it, to transport it, digital currencies get rid of all that,” Byles added. &nbsp;



Jam-Dex will only be available for domestic use and will operate under a hybrid model which “aims to combine the benefits of both wholesale and retail” CBDCs, the Bank of Jamaica (BOJ) <a href="https://boj.org.jm/a-primer-on-bojs-central-bank-digital-currency/" target="_blank" rel="noreferrer noopener">said</a>. A wholesale CBDC is one  issued by the central bank to commercial banks only for bank-to-bank settlements, as compared to a retail CBDC, which is issued to both commercial banks and the public for general use. 



The BOJ will issue Jam-Dex to commercial banks and to other deposit-taking institutions, such as building societies, merchant banks and authorized payment service providers. These entities will then distribute CBDCs to the retail market.&nbsp;



The structure is similar to what the Federal Reserve mentioned in <a href="https://cms.blockworks.co/fed-opens-debate-on-cbdc-takes-no-policy-stance/" target="_blank" rel="noreferrer noopener">its January </a>report, where officials said that the Fed is supportive of an intermediated CBDC.&nbsp;



“Jamaica is interesting because they have gravitated towards the intermediated model, which is what the Fed is talking about,” said Jonathan Dharmapalan, CEO of eCurrency, which provides technology for central banks to issue and distribute CBDCs.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“The structure is that the central banks are responsible for the minting, issuance and redemption of central bank digital currency, but they&#8217;re not involved in the distribution, they are not involved in the circulation to the public.”&nbsp;</blockquote>



Byles is confident that Jamaicans will want to use the CBDC because it will be accessible through an app on their cell phones, which Byles said the vast majority of Jamaicans own.&nbsp;



“[Jam-Dex] promises to enroll a lot more people in the banking system because it is a product that doesn&#8217;t cost them anything,” he said. “If they have a banking product that sits on that telephone that costs them nothing to use, I believe they will become far more user-friendly towards the banking network than they are currently.”



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