IFC speaks to Marla Dukharan, Economist and Advisor on the Caribbean and Chief Economist at Barbados-based fintech Bitt Inc, about the impact of digital technology on Caribbean IFCs and the economy in the region as a whole.
IFC: As digital technology becomes increasingly important in international finance, how are we seeing fintech adopted in the Caribbean region, and would you say that the region has been quick to embrace this technology?
Marla Dukharan: In this region, we have seen the adoption of a fintech regulatory sandbox in Barbados and an insurance sandbox in Bermuda. I am not aware of a regulatory sandbox anywhere else in the Caribbean, so I would not say the region has been quick to embrace technology. In my view, Bermuda has made the most advances in amending its legislation and regulations around embracing fintech and digital assets.
IFC: Do you feel that certain Caribbean jurisdictions’ status as offshore financial centres makes them inherently more hospitable to fintech development, when compared to their onshore counterparts, or is it simply a question of willingness to embrace change?
Marla Dukharan: I don’t necessarily see linkages between openness to or adoption of fintech onshore in those jurisdictions which also offer international financial services. The countries which do offer offshore financial services tend to have more (offshore) corporate registrations of fintech entities, and so they have had to respond by updating legislation and regulations, as has Bermuda; and the Cayman Islands is in the process of drafting new legislation now. In the case of Bermuda, it has been a deliberate diversification strategy of the government to create an enabling environment for the development of the fintech and blockchain industries as a source of high-quality employment and means of attracting investment. In the case of the Cayman Islands, for example, the jurisdiction already offers the offshore tax-exempt tech hub at Cayman Enterprise City, seeking to attract firms in the blockchain, fintech, internet, technology and media sectors.
In terms of notable onshore fintech developments, Bahamas has launched ‘Project Sand Dollar’ to create a Central Bank Digital Currency (CBDC), and the Eastern Caribbean Central Bank has embarked on a CBDC pilot with Barbados-based Bitt Inc.; both projects embrace not only change, but also the benefits that new technology can offer in terms of providing better services to their citizens.
IFC: Differentiation seems to be the watchword of international financial centres at the moment; how are Caribbean IFCs differentiating themselves in terms of their blockchain and fintech offerings?
Marla Dukharan:The Caribbean is not one homogenous space, so in fact we find quite a bit of differentiation within the region itself in terms of services and specialisations. Within the Caribbean, Barbados (which recently converged its offshore and domestic business sectors) and Bermuda are the jurisdictions at the forefront, having adapted their legislation and regulations to accommodate blockchain and fintech more broadly. In the case of Barbados, while a fintech regulatory sandbox has been launched, new or amended legislation and regulations are yet to be adopted.
IFC: What opportunities does the digital economy, and particularly fintech, represent for the people and economies of the Caribbean region?
Marla Dukharan:The digital economy presents exciting possibilities for the region and its citizens, including untold opportunities for the Caribbean in terms of achieving job creation, growth, socio-economic development, sustainability, and resilience. Arguably, these opportunities also exist in any jurisdiction where connectivity and digital access have been priorities. Unless we in the Caribbean make a deliberate choice to create an enabling environment and appropriate conditions to harness the potential of this sector, we run the risk of being left behind.
In fact, of the 17 interconnected objectives known as Sustainable Development Goals, eight require the achievement of universal financial inclusion as a prerequisite for success. To this end, the World Bank has set the goal of achieving universal financial inclusion by 2020. Should the Caribbean region harness fintech as a sustainable solution to its fundamental socio-economic challenges, the consequence could be high net brain gain and net inward migration on a per capita basis. The fact that the digital economy is growing faster than the traditional economy highlights the opportunity for not only job creation but also for sustainable growth.
To embrace the digital economy, the Eastern Caribbean is already piloting a digital version of its currency; Montserrat plans to create a digital financial ecosystem on the island; the Cayman Islands and Jamaica are shifting towards an E-Government platform with the assistance of Estonia’s e-Governance academy; and Barbados’ new Government has articulated a host of reforms aimed at embracing the digital economy.
Specific to the fintech space, I see a clear role for blockchain and distributed ledger technology (DLT) to play in improving financial inclusion. According to the World Bank, around 1.7 billion people were unbanked in 2017, while two thirds of them own a mobile phone which could provide them with access to the financial system. There are many countries in the Caribbean that suffer from relatively low levels of financial inclusion; new financial technologies offer the possibility of boosting this digitally through mobile telephones. M-PESA in Kenya, for example, which allows people to send and receive money via SMS message, is reported to have lifted as many as 194,000 households – 2 per cent of the population – out of poverty and reduced the cost of remittances by 90 per cent.
Financial inclusion is also particularly important in addressing the gender gap in the Caribbean and achieving the Sustainable Development Goal of gender equality. Women are disproportionately affected by both poverty and financial exclusion (Dukharan 2018) . Illustratively, over one billion women worldwide and 52 per cent of women in the Caribbean and Latin America are unbanked, underpinning gender inequality, which costs 10-37 per cent of GDP worldwide (Dukharan 2018). Again, referring to M-PESA as evidence of the long-term development implications of fintech solutions like mobile money, it has been notably effective in improving the economic lives of poor women and of members of female-headed households. The use of digital platforms provides women with greater access to markets, knowledge, and more flexible working arrangements which can result in higher female employment rates on digital platforms than in traditional industries. This technology could also be expected to greatly impact the informal sectors, potentially integrating them into a more inclusive financial system.
Caribbean countries are becoming increasingly financially excluded because of de-risking, which constrains their ability to capitalise on the opportunities presented by emerging technologies and the ‘gig economy’.
IFC: What are the potential benefits and challenges for Central Banks that embrace blockchain technology, and how are these being felt in the Caribbean?
Marla Dukharan: Central Banks can achieve improved seigniorage with the use of central bank digital currency (CBDC), particularly as digital currency saves substantial costs relating to minting and issuing physical notes and coins and to secure transportation, storage and distribution. There are other clear advantages such as non-counterfeitability and improved auditability, the latter of which makes it easier to comply with Anti-Money Laundering (AML)/ Combating the Financing of Terrorism (CFT) frameworks. However, one of the most important gains specific to this region is the ability to facilitate cross-border trade through intra-regional settlements. The region relies on correspondent banks outside the Caribbean to facilitate intra-regional transactions, and challenges persist with respect to having sufficient foreign currency reserves to facilitate these.
Blockchain can be used to specifically address this situation, in conjunction with the use of smart contracts, facilitating multilateral digital currency swaps and allowing the Caribbean to circumvent the use of the US Dollar for transactions among its member nations. For this purpose, Bitt has conceptualised a regional payment solution known as the Caribbean Settlement Network (CSN), which would enable multiple bilateral CBDC swap agreements with other nations within the region, so that little or no intra-regional trade or remittance flows will require hard currency for settlement. Instead, each payee will receive funds in their own CBDC via a digital wallet.
Internationally, the use of CBDCs for wholesale cross border transaction settlement (W-CBDC) is already underway, as announced by the International Monetary Fund’s Managing Director Christine Lagarde, between the Bank of Canada, Bank of England, and the Monetary Authority of Singapore. Bitt’s digital payments solutions, including the CSN, can reduce settlement times and cost, mitigate the over-dependence on foreign correspondent banking relationships, and facilitate a regional trading system which eliminates the need for USD as a medium of exchange within the region. The significance of this simply cannot be overstated given the region’s ongoing challenges with de-risking and potential global financial exclusion – a key pillar of persistent poverty, which is already estimated at 40 per cent in the Caribbean.
IFC In your opinion, are there any jurisdictions that are particularly progressive in this area, and why are you excited about them?
Marla Dukharan: With regulatory sandboxes in place in Barbados and Bermuda, these countries are certainly on the cusp of building an enabling environment. The Eastern Caribbean Central Bank’s CBDC pilot will be an exciting development to follow, as will the development of a CBDC, through Project Sand Dollar, in The Bahamas.
i. Dukharan, Marla. The Future is Female and Digital (in that order); June 2018. online https://marladukharan.com/2018/06/25/the-future-is-female-and-digital-in-that-order/
Marla Dukharan Recognised as a top economist and advisor on the Caribbean, Marla has led discussions and published reports on the Caribbean implications of COVID-19, the EU Blacklists, BREXIT, and changing US and Chinese policies, among other geopolitical developments. Marla has become a highly sought-after keynote speaker internationally on Caribbean issues, and she regularly advises private sector executives and multinationals to support their strategic decisions in the region.