By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank has unveiled the limits it will impose on Bahamian digital currency holdings to protect financial stability and prevent “runs on bank deposits”.

The regulator, in a paper on the Project Sand Dollar initiative to create a Bahamian digital dollar, said these “ceilings” would differ according to user category and ensure that the project “does not operate in practice as a substitute for traditional bank deposits”.

While Central Bank-regulated financial institutions will have no limits placed on their digital currency holdings, businesses will be permitted to hold balances equivalent to the greater of $8,000 or five percent of their annual sales receipts. A “maximum ceiling” of $1m will apply.

Companies employing the digital Bahamian dollar to conduct transactions will also be subject to proposed limits of 1/8th of annual sales or $20,000 per dealing - whichever is greater. Similar “ceilings”, albeit lower, will also be imposed for individuals according to the level of due diligence they are subjected to.

Users who submit to “basic due diligence” will have their digital currency holdings capped at a maximum of $500, with monthly transactions limited to a collective $1,500 set against either verifiable receipts or payments.

Personal accounts, which would face a higher level of Know Your Customer (KYC) scrutiny, will face a maximum balance limit of $5,000 and annual transaction limits of $100,000 or $10,000 per month.

With the first test phase for Project Sand Dollar set to launch in Exuma today, before it expands to Abaco in February 2020, the Central Bank said it needed to balance ambitions for better financial services access and inclusion - especially among far-flung Family Island communities - and a more efficient, less costly domestic payments system with its financial stability objectives.

“One concern is that a CBDC (Central Bank digital currency) could compete with traditional banking services as a deposit alternative and draw resources out of banks,” the Central Bank said. “If it were to happen on any significant scale, it would leave the issuing central bank in the suboptimal position of having to reallocate domestic resources, a role that is best reserved for licensed financial institutions.

“A consideration, too, is whether holdings of digital currency would earn interest, which would be another reason for the public to view them like deposits. Financial stability risks would also be highlighted by concerns that sudden, large shift of funds into CBDCs could present a form of bank run.”

To guard against such risks, the Central Bank said the limits placed on digital currency holdings for all users would ensure Project Sand Dollar “does not operate in practice as a substitute for traditional banking deposits”.

“Moreover, to be enabled for higher-value transactions, personal digital wallets will have to be linked to deposit accounts at domestic financial institutions, into which any excess holdings of the currency would have to be deposited,” the regulator continued.

“Because the ultimate goal of Project Sand Dollar is financial inclusion, individuals would still be able to have mobile wallets without the need for a bank account, but with less functional capabilities. Without exception, though, all wallets held by businesses would have to be linked to established bank accounts. To further remove similarities with deposits, interest will not be paid on any holdings of digital currency.”

The Central Bank said an early-warning system is also being incorporated into the Bahamian digital dollar to detect any “critical threats on individual banks’ liquidity”. It added: “It will deploy circuit breakers, if necessary, to prevent systemic instances of failures or runs on bank liquidity.”

Detailing how digital payments would work, the Central Bank said the dedicated point of sale terminals used by receiving merchants will scan QR codes on mobile phones or the digital Sand Dollar card to trigger transactions in “a secure tokenised environment”.

“Potential high volume originators of mobile payments for payroll, social assistance and other purposes will also have access to batch transactions processing capability, utilising the Sand Dollar infrastructure and platforms developed by the PSPs (payment services providers),” the Central Bank said.

“This includes the government, NIB and private businesses. These would be akin to batch transactions currently processed through the [banking system’s] ACH (Automated Clearing House) but with gross and net settlements occurring in digital currency.”

To facilitate the digital Bahamian dollar’s smooth roll-out and functioning, the regulator revealed that legal reforms allowing credit unions, payment services providers and money transmission businesses (MTBs) access to direct settlement accounts with the Central Bank will be passed in early 2020.

“The draft new Central Bank legislation contains provisions that would level the playing field even further,” the Central Bank said. “The Bank has signalled that it will allow direct participation of non-clearing banks in the ACH and RTGS (Real Time Gross Settlement) systems.

“Regulated credit unions, international banks, PSPs and MTBs would be permitted to establish settlement accounts directly with the Central Bank as opposed to having to negotiate settlement arrangements with commercial banks.”