Above: Cryptocurrency is beginning to touch all aspects of modern finance and the Caribbean has an opportunity to get ahead of the curve. Photo of Maracas Bay by Mark Lyndersay.

Cryptocurrency is once again in the headlines. Bitcoin is still seeing explosive growth and recently broke the $23k barrier. Consumers have long been a driving force in crypto, often using popular mobile apps to trade it alongside other commodities like gold. And now institutional investors are flooding the market.

However, cryptocurrency is about more than Bitcoin. The blockchain technology that drives it and other cryptocurrencies has the potential to revolutionize finance. This represents a unique opportunity to modernize the notoriously opaque and challenging Caribbean finance.

Caribbean finance sector has many obstacles to growth

There are a series of significant challenges that face the Caribbean finance sector. Some are structural and others are entirely self-inflicted. Alone these factors would be easy enough to overcome; combined they become an insurmountable wall.

The biggest challenge facing the Caribbean finance sector is undoubtedly corruption. Illicit financial flows, which many Caribbean banks unfortunately help facilitate, cost developing countries around $1.26 trillion per year. To make matters worse Caribbean banks are helping to facilitate tax evasion around the world.

European Union studies have estimated that around 20% of all US corporate profits are held in tax havens and small offshore tax shelters. It is estimated that 32 nations account for 8.5% of the world’s crossborder investments. Of these 32 nations, 15 are Caribbean and they represent well over half of the investments, which significantly outsripping the countries’ GDP.

This has led to major countries enacting stricter “know your customer” (KYC) and anti money laundering (AML) regulations, which have hit the Caribbean finance sector hard. This tougher stance has led to many major banks engaging in “de-risking.” This is the practice of closing services provided to smaller institutions believed to have been involved in money laundering, or tax evasion.

This has most harmed Caribbean banks that are more reliant on correspondent transactions from the US. The Caribbean Association of Banks (CAB) estimates that correspondent transactions declined by 27% between 2014 and 2016 as a result of de-risking efforts by larger financial institutions. This is a particular challenge for the Caribbean where the financial services sector makes up a disportionately large part of the economy.

Aside from these somewhat self-inflicted challenges, there are problems outside of the financial sector’s control. These include structural inefficiencies, high currency conversion fees, and environmental challenges. When combined, it becomes clear that radical action is necessary if the Caribbean financial sector wants to turn things around. That is where blockchain comes in.

Blockchain technology can help build transparency

Blockchain is no panacea. But intellently applied, it has the potential to help resolve many of the problems with the Caribbean finance sector. In particular, a closed blockchain ledger could help with transfers between Caribbean financial institutions and make it easier for banks to be up-front with international regulators regarding their intentions.

This would work because blockchain technology is essentially a large trustless ledger. Once data is placed and confirmed on the blockchain, it is impossible to secretly edit it. Additionally, each transaction on the blockchain is able to be traced from its entry to exit point. Blockchain technology also makes it possible to allow regulators, or even other banks, to view your ledger without being able to make edits or changes, which is useful for breaking down information silos.

By the same token, blockchain could also be used to provide wider access to financing for Caribbean business. Governments, international funds, and NGOs could counter corruption by tracking exactly how resources are being spent on the ground. The flow of funds could be tracked from beginning to end, which would limit the room for corruption.

Blockchain could also be helpful in connecting the region’s economies together. Currently, Caribbean economies use different currencies, which brings in significant exchange costs. A single digital currency could help to connect these regions together and make it easier for Caribbean governments to act in concert and build policies that benefit the region as a whole.

The Caribbean is already talking about Blockchain

Since 2017, there have been voices in the Caribbean finance sector citing blockchain as a solution to the challenges of de-risking. This is so specifically because blockchain could reduce the “cost of trust” and make it significantly easier for financial institutions to understand where money is coming from and where it is going.

Recent crypto advances, particularly Libra and Paypal’s opening up of crypto wallets, have also created new opportunities and challenges for the Caribbean. Around 65% of the Caribbean population is unbanked. Crypto solutions could help these people access financing solutions, particularly with mature decentralized crypto lending platforms.

However, the Caribbean Council is concerned that Caribbean governments are not prepared for this. A rush of Caribbean people using cryptocurrency could sideline local governments and essentially strip Caribbean nations of their financial sovereignty. However, a unified response to cryptocurrency could help the Caribbean gain an edge over larger nations and protect their financial sovereignty.

This is exactly the approach that Bitt, a Barbados-based fintech company is urging governments to take. The company wants Caribbean central banks to issue digital currencies that would help to enable free flow of finances between Caribbean nations. This has already begun to happen.

To little fanfare, the central bank of the Bahamas launched the world’s first central bank-backed cryptocurrency on October 20th, 2020. This was part of the Sand Dollar project. The bank is attempting to issue a digital version of the Bahamian dollar and implement a payments system infrastructure to support it. This was the next phase of a trial program which began in 2019, where 48 thousand Sand Dollars were issued on the islands of Exuma and Abaco.

Similar projects are underway in other parts of the Caribbean. The Eastern Caribbean Central Bank is also nearing the launch of its own project coined the DXCD currency. This is a digital equivalent of the Eastern Caribbean dollar, also known as D-cash. Other countries are also looking for novel ways to leverage existing cryptocurrencies, like Bitcoin.

It’s a unique opportunity to lead the curve

While other countries, notably China, are flirting with the idea of a national digital currency, the Caribbean remains ahead of the competition. If Caribbean governments come together and organize a coherent multi-lateral cryptocurrency policy they could become the model for a new way of doing business. This would enable Caribbean governments to simultaneously combat corruption, restore their reputation, and create a world-leading cryptocurrency ecosystem.

About the author

Toni Allen is a contributor and editor at Commodity.com, a leading resource on commodities markets and trading. She enjoys sharing insights that help new investors save money and avoid common pitfalls. In her spare time Toni enjoys spending time with her family and exploring the outdoors.