Jamaica, we have a CBDC

Previously on FT(AV) Jamaicawatch, we chronicled how the Caribbean country hit rock bottom, turned a corner and weathered potentially catastrophic headwinds. 

Which is admirable, but you may be forgiven for not expecting Jamaica to be at the front of international financial innovation. 

To these sceptics, we present Jam-Dex, aka “ackee money”:

Jam-Dex was launched in July 2022, and is one of only four fully-launched retail CBDCs in the world, sharing the stage with the Bahamian sand dollar, the Eastern Caribbean DCash and Nigeria’s eNaira.

Despite its recent economic success, Jamaica still suffers from stagnant public sector wages, rising costs and rocky social services — developing digital cash might seem like it should be low in the country’s hierarchy of needs.

And sometimes if you build it, they don’t come. As of February 2023, the total number of Jam-Dex customers was 190,000, while total transactions for 2022 were valued at $357mn, less than 0.01 per cent of Jamaica’s $4.7tn electronic retail transactions for that year* and 0.1 per cent of currency in circulation. A lack of merchant sign ups and technical difficulties in October meant that early adopters of the CBDC had nowhere to spend it. The government tried to reward the first 100,000 people who signed up for Jam-Dex with a J$2,500 ($16) bonus, but only 36,000 showed up.

In April this year, the finance ministry announced two more incentive programmes:

— the “Small/Micro Merchant Incentive Program”, which will reward 10,000 food stores, gas stations and salons with a J$25,000 ($164) deposit
— the “Wallet-holder Individual Loyalty Program”, which provides regular users with loyalty points that can be redeemed for cashback.

Jamaica’s old friend, the IMF, is sitting on the fence, noting in February the “nascent benefits for financial inclusion” and “the need to manage possible risks” and adding, in March, that “operational frameworks have been developed to help manage the potential risks . . . though issuance has remained limited thus far”.

The eNaira, sand dollar and DCash have all also struggled since launching. 

Despite the less-than-stellar results from places that took an early plunge, CBDCs are continuing their shaky march. The Bank for International Settlements recently surveyed 86 central banks, of which 93 per cent have “engaged” with digital currencies. That broad category includes central banks which have carried out research (eg New Zealand), are developing a CBDC (eg the European Central Bank), piloting one (eg China) and the four aforementioned pioneers. By the end of the decade, the BIS says a total of 24 CBDCs could be in circulation.

King cash is on the decline in stronghold economies like Japan — which launched a pilot CBDC programme in April — with BoJ data showing a rapid decline in the national stock of coins over the past 18 months. The Reserve Bank of India says it is aiming for one million transactions per day through its pilot by the end of this year. 

In the US, where the regional Federal Reserves have conducted tests on both wholesale and retail prototypes, the idea of a CBDC has been met with such an American response that the Fed has had to deny its new, unrelated FedNow payment system is a CBDC. “Britcoin” spurred a record 50,000 Brits to write to the Bank of England and some interesting motorway graffiti (pictured below). Many countries already have useful digital payments platforms. 

Jamaica is a much smaller economy than some of the heavyweights on that list, and motives for issuing a CBDC shift according to national wealth. The BIS survey noted that for emerging and developing economies, CBDC work is more often driven by financial inclusion-related reasons than in advanced economies — and emerging economies tend to be further along on CBDC progress than advanced economies.

But looking at the how and why of Jam-Dex’s fortunes so far could offer some instructive lessons for other central banks with similar motives.

So why did Jamaica forge ahead with its CBDC? It’s simple: graphic design financial inclusion is the Bank of Jamaica’s passion. 

“The majority of Jamaicans are financially excluded,” said deputy governor Natalie Haynes in 2022. “To get those persons into the formal financial system, we decided that the central bank digital currency would be a good opportunity.”

According to the Caribbean Policy Research Institute (Capri), 17 per cent of Jamaicans lack bank accounts, 45 per cent of employed persons receive their salaries in cash or cheque and only 13 per cent of Jamaicans borrowed from formal financial institutions in the six months leading up to February 2022. While 17 per cent is not a relatively huge unbanked level by some tallies, the level of account inactivity is higher at 23 per cent. 

“Even if people have bank accounts, they choose not to use them. Their salaries come in and they go to the ATM to take it out in cash,” Caribbean economist Marla Dukharan told FTAV.

Bringing more Jamaicans into the formal financial system would be an obvious win, giving the state more access to taxable income and individuals and businesses more access to capital. But it is not as simple as offering a competitor to cash and the reasons that people don’t engage with the financial system are varied.

One is the prohibitive charges account holders face when spending or transferring money.

“There is no charge to use cash per se, whereas when people look at their bank statements they can see that every time they use their debit cards they’re paying 5c or 10c, which is a tangible cost,” said Dukharan. Many Jamaicans also lack the money needed for bank account minimum opening deposits.

High costs can be partially explained by the structure of the banking system and regulation. There are currently eight commercial banks operating in Jamaica, but two — National Commercial Bank and Bank of Nova Scotia — hold a 60 per cent market share, according to BoJ data. World Bank data shows that in 2016 Jamaican banks had an average interest rate spread (a useful proxy for profitability) of 13 per cent, much higher than average for other low and middle income countries, and high returns on equity.

“While a number of factors can influence outcomes in these areas including sector depth, bank funding and business models, risk-related considerations, the profitability and costs associated with basic banking services are very high in Jamaica,” which may suggest “banks are not sufficiently incentivized to compete with one another for deposits and customers,” says the Inter-American Development Bank.

Furthermore, many Jamaicans are unable to fulfil strict KYC and AML requirements because they lack identification, proof of address, a tax identification number and in some cases, a character reference — 41 per cent can provide only one of these, according to Capri. 

Then things get knottier:

Over one in ten unbanked Jamaicans are in that position at least partially because they don’t trust the government and financial institutions.

“There are historical factors like the legacy of colonialism and slavery, which gave the majority of the population very good reason to distrust the government and the authorities,” says Capri executive director Damien King.

Jam-Dex addresses the first issue. It’s free to set up and use, and unbanked customers benefit from “streamlined and simplified KYC requirements” and can convert their cash into Jam-Dex via ATMs. And although there is currently only one Jam-Dex wallet provider, Lynk, two others are said to be in development.

As for those who are worried about the government — or the 5 per cent concerned about what God might think — it’s unclear which political or theological issues Jam-Dex can address.

However, there may be a cluster of people somewhere in the middle, for whom Jam-Dex is simply just not particularly useful — yet.

“It’s the network effect, it doesn’t make any sense for anybody to use it unless friends and neighbours have it, and merchants don’t accept it widely,” said King.

That could mean adoption of Jam-Dex and other CBDCs depends on how enticing the incentives to use it are. 

“[The incentives] are just the start of the journey,” says Lynk CEO Vernon James. “Making it mainstream and used across the country will require not just cash incentives but investment in education and technology. It’s not enough but a good start.”

*These numbers would obviously be higher if Jam-Dex had been available throughout 2022, but are still a drop in the Caribbean Sea.