Keywords: central bank digital currency sea urchin project
By the way: Sand dollar, many translations or writing articles are called sand dollars, sand dollars, it is hoped that the fallacy of the meaning is the sea urchin. The Bahamas is an island nation in the ocean, rich in marine life, and it is reasonable to use it as the code name for the country's CBDC project.
After more than half a year of preparations, on December 24, the Central Bank of the Bahamas announced the plan for the sea urchin project, announcing the official launch of the project, first in the Exuma region, and in the first half of 2020 in Abaco. .
The Bahamas is a Caribbean island country with a population of only 390,000 and a land area of only 13,000 square kilometers. However, in the Latin American world and black countries around the world, it is one of the richest countries: in 2018, the per capita GDP was US $ 34,400, ranking 26th in the world ( IMF data), after the United States and Canada, it ranks third in the per capita GDP of the Americas. Because more than 90% of its population is black, it is known as the only country with a "color" in the global wealth club.
In such a generally affluent country, is there still room for issuing digital currencies to improve inclusive finance?
I. Background of the Bahamas issuing CBDC
Island is sparsely populated : From the geographical environment, the Bahamas is composed of more than 700 islands and more than 2,400 coral reefs. The multi-island environment constitutes a rich tourism resource, but there are more than 30 islands that are truly inhabited. New Providence Island, where the capital Nassau is located, has the largest population of 250,000, and many other islands have populations of less than 3-4 digits. Although financial services is the second largest industry in the Bahamas, it is for offshore finance. If you only look at the statistics, there are more than 500 banks in the Bahamas. The density of bank outlets ranks 35th in the world, and the density of self-service banking facilities ranks 15th (Bahamas Central Bank, 2019). However, the population is too scattered, which obviously increases the cost of cash services, and it cannot fully cover all the population. The Bahamas Central Bank also acknowledged in the "Sea Urchin Project" report:
"Although the average indicator of financial development and financial opportunities in the Bahamas is high by international standards, some of the population is excluded from the regular system because of the remoteness of some residential areas and the lack of effective banking services."
Natural disasters : The Caribbean is the region where tropical hurricanes are active, and the Bahamas suffers. For example, Hurricane Dolly hit the Bahamas in September 2019, causing economic losses of US $ 7 billion and displacement of 70,000 people. Only in Abaco (the second area planned for the sea urchin project pilot) and the Grand Bahama Island, half of the houses were destroyed and the refinery Airports and hospitals have been severely damaged. There is no completion of eggs under the nest, and cash service facilities must be severely damaged. How to solve the daily transaction problems when there is no electricity or network is imminent.
Offshore Finance : Finance, tourism, and shipping are also called the three pillar industries of the Bahamas, and their output value accounts for about 20% of GDP. The IMF estimates that the Bahamas' international offshore financial services industry has assets of US $ 598 billion, about 60 times the country's GDP, ranking fourth in the world's offshore financial services industry, ranking only in the Cayman Islands, Hong Kong, and Singapore. after that. (Data from China Consular Service Network) Bahamas-type offshore finance, which is tied with London and New York, has only accounting and no substantial business, so it is also known as tax avoidance offshore financial market. The government implements free and open financial policies and special offers. Tax system, foreign banks can conduct financial activities more freely, can be exempt from personal income tax, corporate income tax, capital gains and benefits income tax deduction, and exempt from any property tax, foreign companies and their assets are not subject to foreign exchange regulations The Bahamas is known as "Zurich in the Caribbean", and the capital Nassau alone has nearly 400 foreign banks. As a well-known offshore financial center, the Bahamas, while attracting a large amount of low-cost capital flows, has also become gray due to the lax legal environment, less information disclosure requirements, and gray areas and gaps in the regulatory field. And black fund shelter. For example, the stablecoin USDT reserve case occurred in 2019, and its issuer, Tether, stated that it had stored $ 1.7 billion in the Deltec Bank of the Bahamas. However, according to data released by the Bahamas Central Bank, there was no corresponding amount of US dollar inflows during the period. The offshore financial industry in the Bahamas has been criticized by the international community for a long time, and its AML / CFT (anti-money laundering and counter-terrorism financing) implementation has a high level of risk assessment. It can also be seen from the report that in recent years, the Bahamian government has encountered “all kinds of rejection” and opposition after strict management of KYC (Customer Due Diligence), AML / CFT and other aspects.
National currency sovereignty and coinage tax : The Bahamas is a semi-official dollarized country, that is, the national currency of the Bahamian dollar and the US dollar are both legal tender and belong to the dual currency system. The state-owned central bank has considerable autonomy in implementing monetary policy. . As a national policy choice, dollarization brings benefits such as reducing transaction costs, curbing inflation, reducing exchange rate and interest rate fluctuations, and eroding national sovereignty and coinage taxes. As stated in the IBM & OMFIF report, the choice of issuing a CBDC may be a solution to this problem. In their survey, the island economies considered the impact of issuing a CBDC on the minting tax to be positive:
For dollarized economies, CBDCs provide a means to regain greater control of their domestic monetary system. … For example, in order to regain currency sovereignty, the Marshall Islands is developing its own digital currency "sovereign currency". (IBM & OMFIF, 2019)
Cash preference and transaction costs : It is estimated that the euro area and Canada and cash issuance and operation management costs account for 5% of GDP. Cash operating costs are even higher for small economies. For island economies such as Marshall and Bahamas, on the one hand, natural factors lead to high costs of cash operations; on the other hand, some people who do not have bank accounts and cannot access banking services (unbanked & underbanked) do not trust banks or commercial electronic payment platforms Or because of the inconvenience of distance, still prefer cash. A survey by the Bahamas Central Bank found that high business costs also inhibited companies' willingness to use electronic payments. Therefore, the central bank believes that the introduction of digital currencies can provide the public with a lower cost option in various trading activities.
Design and Implementation of the "Sea Urchin" Project
In March 2019, the Bahamas Central Bank selected a Canadian-based NZIA Limited startup and Singapore software development company Zynesis as the main partners of the CBDC project. The central bank requires that solutions be designed to address the challenges of the island's natural conditions and financial infrastructure , as well as meet international regulatory standards .
(I) Project plan provided by NZIA
The plan includes the following main contents:
Opening up the old and new payment systems : Ensure that the CBDC can be used in both the new and the existing payment systems, that is, to realize the interconnection and interconnection of the digital currency payment system and the existing payment settlement system.
With offline payment function : the user can complete the transaction when the network communication is interrupted, and the wallet can update the data when the communication is restored.
Real-time verification and transactions : real-time transaction verification and real-time transaction processing.
Multi-terminal payment function : Provide customized solutions for payment service providers, and support enterprises to accept credit card and mobile app payments.
Transaction tracking and information use : Transaction monitoring should protect user secrets and use information in strict accordance with regulatory requirements.
Monitoring fraud crimes .
Restricted use : Digital currencies are limited to domestic use, but holders can purchase foreign exchange through electronic payment through payment service providers and bank accounts.
Wallet authentication : Implement multi-factor authentication for wallet users. When completing a payment transaction, the user must provide two passwords, one of which is randomly generated.
Identity verification : KYC identity verification is added to the system design in order to meet international regulatory standards.
According to the scheme design, the digital currency of the Bahamas can be used in two areas: retail and wholesale. Wholesale is used for inter-bank payment settlement. Retail is for the public payment link. Digital currency holders, like holding cash, are holding claims on the central bank.
(II) Factors considered by the central bank
Monetary policy and financial stability . There are several issues that must be taken seriously. First, if the central bank issues a CBDC directly, it will have an impact on the traditional banking industry due to the natural information of the central bank and bring about the negative effect of deposit relocation. It caused similar problems and the large-scale transfer of funds, which severely affected the operation of network security and payment systems. In order to prevent such risks, the central bank has added some restrictive provisions to the design plan:
Restrictions on the holding of CBDC : Individuals, enterprises and other non-regulated financial institutions must not exceed the prescribed quota of CBDC.
Wallet classification management : Personal wallets can have mobile wallets that are not associated with an account, but the spending limit is limited. Wallet for large consumption must be linked to a domestic bank deposit account. The corporate wallet must be linked to a bank deposit account.
CBDC is non-interest-bearing : Avoid the possibility of similar deposits with banks and causing large-scale deposit relocations.
Set up a fusing mechanism : monitor transactions in real time, provide early warning, and apply a fusing mechanism if necessary to prevent systemic failures or bank liquidity runs.
The role of key stakeholders. The main stakeholder groups related to the CBDC include the central bank, the public sector (including the National Insurance Commission), financial intermediaries approved by the central bank, general enterprises and entities, and the public.
Central Bank : Issues CBDC, registers and monitors CBDC holdings, and centrally manages holders' KYC authentication data in accordance with ALM / CFT standards in order to share customer information with government agencies.
Public sector : As the operator and management of public utilities, the public sector is the main initiator and recipient of the CBDC, and is also a direct participant in the automatic clearing center in the modern payment system. In addition, they have the most data for general enterprises participating in CBDC transactions.
Banks and other financial intermediaries : linking the CBDC wallet and deposit accounts, subject to supervision and the wallet holder's consent, to directly debit or withdraw from the holder's deposit account in real time, responsible for customer due diligence, and providing customers for payment service providers KYC information.
General enterprises and entities : represents the core business of CBDC payments. The registered wallet must be associated with a bank account, and the registration information should correspond to the business registration license in order to use the information of the tax department.
Public : Individuals and individual owners of small and micro enterprises initiate and accept CBDC transactions. For such roles, the central bank requires financial intermediaries to conduct customer due diligence based on transaction activity, and distinguishes between operating and non-operating accounts.
3. Provisions on wallets, transactions, etc.
Set different limits based on user categories and customer due diligence:
There is no upper limit on the holding of CBDC by financial institutions .
The CBDC held by other non-personal wallets is 8,000 yuan or 1/20 of its annual sales, whichever is greater, but must not exceed 1 million yuan; the monthly transaction limit is 20,000 yuan or 1 year of sales / 8, whichever is greater.
The maximum limit of CBDC held by a personal ordinary wallet is 500 yuan, and the monthly transaction amount is 1,500 yuan. If after stricter customer information survey and verification, the personal monthly transaction limit can be increased to 5,000 yuan, and the annual transaction amount is 100,000 yuan (or 10,000 yuan per month). If you conduct transactions through the wallet associated with your bank account, you can increase the transaction limit on this basis. In order to meet the requirements of AML / CFT, the central bank may change these regulations as needed.
(Three) the process of establishing a wallet and using CBDC
Establish a wallet : Users download the app to a mobile device (Apple or Android system), perform account settings through an authorized service provider (including banks, payment service providers), start the lowest level transaction, complete further due diligence, and then use Multifunction.
In addition to soft wallets such as mobile apps, Kaki wallets will also be piloted to meet the different needs of users.
Transaction process: In general, the personal wallet payment is made by the payer using a card-based wallet or mobile device, and then the payment is made in any of the following forms:
Main scan : Scan the static QR code of the payee and enter the amount of CBDC to be paid on the next screen;
Scanned: Scan the payee's dynamic QR code with the embedded CBDC amount and confirm on the next screen;
You can also send the CBDB payment amount to the payee through the unique address of the wallets of both parties.
Government departments and enterprises that issue bulk payments such as wages and social relief can be processed in batches through the CBDC infrastructure and trading platform developed by payment service providers. This is similar to the batch transactions processed by the automatic clearing center, except that the payment instrument used is CBDC.
(IV) Implementation of sea urchin project
Prepare for the pilot launch : Prior to the launch of the Exuma pilot, the central bank, urchin project developer NZIA and financial institutions held one-on-one dialogues and group discussions to let participants understand the pilot's goals and strengthen communication between the two parties. The National Payments Committee convened a special meeting with the main stakeholders, focusing on the presentation of KYC standards, data protection supervision standards, and other aspects.
Implementing legal reforms : It is expected that the following amendments to the following laws and regulatory systems will be completed in 2020: amending the central bank bill, joining the regulations of the CBDC and the regulations on direct settlement access of non-bank financial institutions and the central bank; amending the payment bill, and strengthening the protection standards of CBDC users ; Modify AML / CFT rules to meet the needs of online customer due diligence.
Carry out publicity and promotion : The emphasis of publicity and promotion will be to increase the awareness of enterprises and individuals on CBDC, wallet registration process and network security. The central bank promotes through various publicity channels, including print, radio and social media, and organizes various kinds of entertainment and entertainment activities. The focus is to educate users on the encryption protection of CBDC storage, as well as the minimum security and password protection standards required for personal mobile devices, to eliminate user concerns about the security of digital transactions. In addition, in order to improve the user experience, focus on solving the problem of simplifying user registration for KYC and data sharing.
On December 27, 2019, the Central Bank of the Bahamas announced the first trial of the sea urchin project in the Exuma region, and selected Exuma as the first pilot. An important consideration is that the penetration rate of mobile devices in the island population is above 90% ( Note: The Bahamas has a mobile penetration rate of 90% across the country). The Abaco region was selected as the second pilot region, and it is planned to start promoting the CBDC in February this year, with the aim of helping the Abaco region, which was severely damaged by Hurricane Dolly, to restore the financial system as soon as possible.
Note: Red circle is Exuma, yellow circle is Abaco
Assessment of impact on sea urchin project
Increasing financial inclusion : For the geographical conditions of the Bahamas, the convenience and benefits of issuing a CBDC are obvious. It can more conveniently and centrally collect and manage customer KYC data, digitalize deposits, withdrawals, and loans. Banking Expanding beyond physical outlets reduces the cost of opening a physical outlet organization.
Reduce the negative impact of cash use : Issuing CBDC can reduce cash use, strengthen monitoring of financial transactions, and further improve the AML / CFT mechanism, effectively strengthening the country's prevention of money laundering, terrorist financing and other criminal acts. This is very important for the Bahamas to transform its image as a "tax haven" and "gray / black gold protected port". Of course, the use of cash also exposes businesses and individuals to the risk of violent crime and increased storage costs, and the issue of CBDC can solve this problem.
Reduce transaction costs : Current wire transfers, checks, interbank transfers, and existing bill payment mechanisms all have certain transaction costs. The issuance of CBDC will not eliminate these forms of transactions, but can provide the public with a lower cost option.
Strengthening economic monitoring : The popularization and promotion of CBDC can attract more business activities to the main economy and strengthen the general accounting information system of enterprises, which is very beneficial to the government's tax collection and management system. The popularity of CBDC is also conducive to improving the efficiency of overall assessment and monitoring of economic activities and providing stronger support for policy formulation.
Analysis of some characteristics of the sea urchin project
The Central Bank of the Bahamas issued the DCB sea urchin. From the project report it released, the following features can be summarized:
Dual system of issuance management : In the scheme design, financial intermediaries can provide wallets to the public. Instead of directly opening an account with the central bank, the public completes the registration of wallets and transactions through these intermediaries. "It is expected that the central bank will eventually play a smaller role in providing front-end solutions, with a focus on maintaining digital accounts for digital currencies." (Central Bahamas, 2019)
Increase friction through wallet classification and CBDC quota management : According to the connection with the user's bank account, it is divided into two types of wallets, linked and unlinked. Individuals can have two types of wallets, and corporate wallets must be linked to a bank account. Wallet ceiling settings are related to wallet categories and KYC conditions. With associated wallets and wallets with a high degree of KYC, the higher the wallet limit and transaction operations, the lower the contrary. To prevent financial turbulence caused by bank runs, a fuse mechanism has been set up to ensure financial stability.
CBDC interest calculation and anonymous management : No matter how much it is held by individuals or corporate users, interest is not counted. "Equivalent to paper money in any respect and its value will be the same as existing currencies." (Sea Urchin Project, 2019) The Bahamas Central Bank also acknowledged that CBDC does not duplicate the anonymity of cash, but will strictly control confidentiality issues and data protection.
Attach importance to the revision of supporting laws and regulations : While improving the administrative and technical preparations, the Bahamas Central Bank has stepped up the revision of laws and regulations. It will simultaneously complete the revision of central bank bills, payment statutory and AML / CFT rules, and provide legal protection for the issuance management of CBDC.