Emtech’s Cadet talks about CBDCs in emerging markets as the U.S. Congress and United Nations hear about the traditional banking crises.
The Caribbean region is in a tough situation for banking. The 35 nations comprising the region face challenges common to many tiny economies, such as dollarization and dependence on foreign trade and remittances. In addition, the increasingly common banking practice called de-risking is taking a heavy toll. So, it is probably no coincidence that the region is also at the forefront of digital currency adoption.
Carmelle Cadet, the founder and CEO of banking solutions company Emtech, is a native of Haiti who has experience working with central banks in Haiti and Ghana. Her company is also a member of the new Digital Dollar Project Technical Sandbox Program that is exploring aspects of a United States central bank digital currency (CBDC). Cadet spoke to Cointelegraph about her experiences in the Caribbean and the United States. She said rolling out functioning CBDCs in the region is “a long game.” It is easy to see why.
The risks of banking in the Caribbean
The Financial Action Task Force (FATF) lists countries that are under special monitoring for money laundering or other illegal activities. Although only four countries in the region were on the so-called gray list as of June, the list seems to cast a pall over the region as a whole. Because of it, extra due diligence efforts are required when large international banks provide services such as settlement to smaller local banks in those countries in a process called correspondent relationships.
Additional due diligence drives up international banks’ costs of doing business. Banks often choose to sever ties with banks in gray-listed countries rather than pay the increased costs. That decision is referred to as de-risking. Some Caribbean countries have lost 50% of their correspondent relationships, with severe consequences for their economies and societies.
The United States House of Representatives Financial Services Committee held hearings titled “When Banks Leave: The Impacts of De-Risking on the Caribbean and Strategies for Ensuring Financial Access” on Sept. 14. Prime Minister of Barbados Mia Amor Mottley and Prime Minister of Trinidad and Tobago Keith Rowley attended the hearings.
#financialinclusion is possible: Modern #Regulatory Frameworks + Modern #Technology. Banks have moved away from the Caribbean and cost of payments is not going down. It feels like punishment indeed. Thank you for testifying in front of Congress on this topic! #bardados https://t.co/SjLpSw1aT8
— Carmelle Cadet (@CarmelleCadet) September 14, 2022
Mottley described what banking services are like in the region:
“When we were growing up, opening a bank account was part of our rites of passage in becoming an adult. Today […] we spend weeks, and businesses that come into our region spend weeks and months, just to open a bank account.”
Ten days after the Congressional hearings, on Sept. 24, Bahamian Prime Minister Philip Davis brought the issue of de-risking before the United Nations General Assembly. “Why are all the countries being targeted small and vulnerable and former colonies of European states?” he asked. The Bahamas is not currently on the gray list.
CBDCs to the rescue?
According to the Atlantic Council CBDC tracker, three CBDCs have been launched in the Caribbean region: the Bahamas’ Sand Dollar, Jamaica’s Jam-Dex and the Eastern Caribbean Central Bank DCash in seven of its eight member states.
The council lists Haiti’s Digital Gourde as under development. Cadet said Emtech and its Haitian partner HaitiPay presented a proof-of-concept for a CBDC at the Haitian Embassy in Washington on May 5.
Cadet, who immigrated to the U.S. in her youth, was an executive in the IBM blockchain division when the Bahamas made its request for proposals for the Sand Dollar. She was “by luck a little bit in the front seat.” In 2019, when Haiti was “making the rounds with a roadshow” to develop its CBDC, “I thought ‘if the Bahamas can do it, why not Haiti?’” Cadet said. She added, “Kudos to the central bank governor for seeing the possibilities.” She left IBM and founded Emtech.
The first financial technology companies appeared in Haiti in 2010, after the earthquake that ravaged the country, and technologies relying on mobile wallets took the lead, Haitian Central Bank Governor Jean Baden Dubois said in 2021. Dubois said mobile telephone penetration was about 60% in 2008 and “likely higher in 2021.”
Emtech’s proposed CBDC design functioned online and through mobile telephone unstructured supplementary service data. The rollout of a Haitian CBDC would include device distribution through a partnership with a charity, Cadet said. The use of telecommunications rather than data networks to support CBDC functions is a hallmark of emerging economies, she added.
Dubois said the Haitian Central Bank saw a CBDC as a means to achieve greater policy efficiency and increased transparency, which would help the FATF gray-listed country meet Anti-Money Laundering/Combating the Financing of Terrorism standards.
“Dollarization undermines the central bank and its mission of stability,” Cadet said. “Using CBDCs for cross border payments would provide better liquidity and visibility on reserves.”
The peculiarities of emerging markets
Cadet said there are a number of ways in which a CBDC design for an emerging market will differ from one intended for a developed market. Developed markets can “afford to go slower,” she said, as they work toward a real-time settlement, while in emerging markets, CBDCs have a more pressing mission of inclusion.
Emerging markets have “less baggage,” she continued, so fintechs can thrive. In developed markets, commercial banking can make adoption easier, but the CBDC has more legacy systems to integrate with.
Be that as it may, it is not clear how much success CBDCs are enjoying in the Caribbean. The Sand Dollar, commonly considered the first CBDC when it launched in 2020, had only about $300,000 worth of electronic currency in circulation and 30,000 digital wallets in July 2022, with about 845 merchants accepting it. The Bahamian government makes regular efforts to promote it.
DCash, introduced in April 2021, crashed in January and was down for almost two months. A spokesperson for Grenada-based conglomerate Geo. F. Huggins & Co., the first company to accept a DCash payment, said during the outage that the CBDC represented a “minimal” portion of its sales.
Cadet said her company had been in talks with the Haitian Central Bank “to understand licensing and risk” for about a year before its proof-of-concept presentation and has been in touch with the bank since then. She said the company is now waiting for the central bank to issue a request for proposals for vendors.