Consideration on the issuance of a digital Gourde by the Bank of the Republic of Haiti.
Author: Daniel Silva. February 2019
Innovations in the financial sector that provide an efficient way to make and receive payments are poised to positively impact the long-term growth of economies all over the world. Technological developments designed to reduce costs and inefficiencies could provide the environment necessary for unhampered growth.
As such, a digital currency issued by the Central Bank solves the problem of inefficient physical notes in much the same way that physical notes solved the problem of exchanging value through bulky precious metals like gold or silver coins. Blockchain technology allows central banks to issue a secure, immutable and efficient digital currency. This is considered as the digitization of the national currency and can also be characterized as a “legal digital currency”.
Governing a digital transformation
In the age of digital communication, it is not possible to conduct electronic transactions using banknotes and physical coins issued by a central bank. As such, many central banks are currently studying the economic impact of issuing digital currency to the public. Without central bank intervention, electronic transactions will continue to be facilitated by a fragmented system of legal tender substitutes, namely privately issued e-money and credit cards (banks, money transfer companies, mobile money) that are not part of the money supply. The current system of e-money limits the Central Bank’s ability to control the money supply, reduces seigniorage income, decreases reserves, decreases international monetary control, and modifies the money multiplier.
A Central Bank issued digital currency (Digital Gourde) will not replace physical notes and coins, but will complement them in an increasingly digital society where cash payments are in decline (see the volume of transfers, payments made by cards and by phones). Digital currency use is similar to the way e-mail and social networking platforms complement traditional postal methods and contribute to effective business conduct. In an increasingly digital world, physical currency presents a set of challenges that can easily be solved through a digital transformation of currency, it includes:
• The inability to transact in e-commerce and digital settings
• The recurring cost of printing and coining physical currency
• Security and risk of theft during transport and storage.
• Logistical challenges and costs of transporting physical money
• Limit in transactions where both parties must be present.
• Time consumption for counting physical money
• Circulation of counterfeit money
• Physically damaged currency requiring their removal from circulation
• Problems of tracking tax evasion and money used for illicit purpose
• Bacterial, fungal and virulent contamination of paper notes and coins.
Cryptographically produced Gourdes cannot be forged. A fixed quantity of Digital Gourdes in circulation will be issued by the Central Bank and no other entity may add or remove a Digital Gourde. BRH can monitor digital transactions at an unprecedented level, with greater accuracy than physical cash transactions that are anonymous and more likely to be used illegally.
The new levels of transparency will mean that Anti-Money-Laundering and Anti-Terrorist financing measures will become more robust, as will the government’s ability to draw tax revenues previously evaded.
When there is a growing number of fragmented systems of private e-money such as mobile recharges like MonCash, Lajan Cash …, a single digital instrument, in this case the Digital Gourde issued by the Central Bank, will solve the problem of interoperability by being used in all cases where digital money is required. This will allow the Central Bank to maintain its function as sole issuer of legal tender in the digital world.
Benefits of issuing a Digital Gourde
The digital currency issued by the Central Bank has several advantages:
Seigniorage is the profit that a central bank makes from issuing legal tender. Typically, it is assumed that central banks do not have a profit objective, but they are presumed to contribute to the efficiency, stability and competitiveness of the financial markets, including the reduction of taxpayer burden where possible. With the Digital Gourde issued in the economy, the Central Bank can save on the costs associated with printing physical notes and coins.
Technology has been advancing at a fast pace to provide robust, secure and convenient payment solutions. For example, due to the platform agnostic nature of digital currency issued by a Central Bank, features such as instant utility bill payment can be achieved through multiple platforms built and operated by different entities. This technology provides services in the economy at a lower cost, providing greater ease of access and scalability. In addition, the Blockchain platform can be used for an efficient system of global clearing and settlement.
Cryptographically produced and secured, digital currency issued by the Central Bank cannot be counterfeited. A fixed quantity of Digital Gourde will be issued by the Central Bank for circulation and no other entity will have the ability to add or remove a Digital Gourde; the process lies in the fundamentals of public / private key cryptography. Since the transactions of the digital Gourde are verified by a consensus protocol on the blockchain, the problem of the double spending is eliminated.
The Central Bank can track digital transactions with unprecedented accuracy, compared to transactions in physical currency that are anonymous and more prone to misuse. The new levels of transparency mean that Anti-Money Laundering and Counter-Terrorist Financing measures will become more robust, as will the government’s ability to gain revenue from previously evaded taxes which in some countries amount to over 20% of GDP. Since the transaction data is stored on the blockchain and can be verified with certainty through the proof of work consensus mechanism, the government-issued Digital Gourde enables greater auditability over existing physical currency while ensuring greater integrity of transaction data.
Central Bank trust and credibility can be enhanced through a modernized monetary transmission system with the digital currency issued by this institution, which will allow it to access a new way of implementing
monetary policy to efficiently and systematically balance the economy.
When there is a growing number of fragmented systems of private electronic money, a single digital instrument, namely the Digital Gourde issued by the Central Bank, will solve the problem of interoperability by being available for use in all instances where digital money is required. This enables the Central Bank to preserve its function as the sole issuer of national currency in the digital domain.
Traditionally, commercial banks have prohibitive costs and requirements for products and services that exclude the most vulnerable members of society. The Digital Gourde will provide access and enable the use of a wide range of affordable and quality financial products and services that the most vulnerable in our society will be able to utilize, namely the unbanked and underbanked.
In addition, thanks to universal access to this currency, Haitians Living Abroad can participate more actively in the national economy. They can acquire digital gourdes through an exchange portal, transfer them to their peers while bypassing the high fees of transfer houses. The support and dynamic use of the digital gourde will help increase the value of the national currency against other currencies.
Encourage economic growth
BRH can use digital currency technology to solve a number of problems in
the payment system today. In traditional payment systems, third-party intermediaries charge fees for their role in facilitating and processing payments. This results in higher transaction costs. A relevant example is the Merchant Discount Rate (MDR) that providers must pay to accept digital payments on electronic payment channels such as Visa or MasterCard. In developing countries, these costs are often perceived as high in relation to the value of the goods sold. It is therefore financially prohibitive for many small and medium-sized enterprises (SMEs) to offer electronic payment solutions which in turn can limit business growth.
This is a key area in which the use of the Digital Gourde between BRH and banks can create a more profitable and efficient banking system. The
technology infrastructure can settle payments in a peer-to-peer manner using Distributed Ledger Technology. This means that merchants will be able to accept payments quickly and securely and that consumers will be able to trade with one another in the same manner.
Since payments are settled directly between the parties, they can be settled with greater speed and transparency than conventional systems, which will improve liquidity constraints. This will give banks and financial institutions the ability to maximize efficiency and move into innovative payment mechanisms through a more digital approach to financing.
From taxes to welfare benefits, governments around the world collect and spend billions of dollars on their citizens. A digital transformation of this cash flow is a shift in strategy from a heavy reliance on physical money to a more efficient, secure and less expensive electronic payment system. By exploiting the potential of blockchain technology, BRH can use this approach to securely issue a legal digital currency.
In summary, a digital currency issued by the Central Bank to the public has the potential to modernize the financial system of the Haitian economy, paving the way for the establishment of a solid framework of payment and settlement with a level of growth unprecedented. The issuance of a digital currency by BRH can also enable the institution to improve the seigniorage and interoperability of outstanding digital currencies, while increasing the scope of its monetary policies and expanding financial inclusion.
BRH could prudently embark on a pilot project and proof-of-concept approach to the issuance of a Digital Gourde. This would be done using a phased approach in a controlled environment to deploy, test and evaluate the viability and feasibility of scaling up. However, the government and civil society will have to recognize the benefits and opportunities of such a proposal. Legislation relating to legal tender and the power of BRH to issue and maintain its legal monetary base should be amended to include legal tender in digital form.
Finally, this proposition suggests an open mind about change in the monetary sector, to build it appropriately to the country’s reality while using
dynamism, efficiency and equity as a compass.
Futurist — Technology Entrepreneur