JamDex Jamaica’s central bank digital currency facing strong headwinds

The rise of digital money

Money as a medium of exchange enables efficient transactions of goods and services in an economy. Absence of a widely accepted medium of exchange restricts transaction to barter and credit arrangements. Two types of money co-exist in a monetary system, with strict separation in where each type is created. Public money or physical cash is generally issued by a county’s central bank and is guaranteed by a sovereign government. Private money is generally created by commercial banks through loan creation and, unlike public money involves credit risk. The supply of private money has traditionally been dominated by banks and credit card companies. Strong growth in e-commerce transactions has led to the decline in the use of cash and, concurrently, an increase in demand for electronic payments. Consequently, technology-driven start-ups (“Fintech”) and large digital platforms (“BigTech”) are increasingly pushing into a market traditionally dominated by banks and credit card companies. This has allowed new payment service providers to capture a significant and growing share of the market for online retail payments. Simultaneously, the development of blockchain technology has prompted the creation of cryptocurrencies and stablecoins. ⁹

These developments have, at least in part, inspired a debate among central bankers about the potential benefits of introducing public digital money in the form of CBDC. ¹⁰ In 2022 when JamDex was launched, Jamaica was among 105 countries which were at various stages in the digital currency adoption process. This was in stark contrast to 2020 when only 35 countries were considering CBDC (Figure 1). Ten countries had fully launched a CBDC, Jamaica being the first to pass legislation to have its digital currency as legal tender. ¹¹ OPEN IN VIEWER

Bank of Jamaica (BOJ)

Bank of Jamaica (BOJ), Jamaica’s central bank, has supervisory and regulatory oversight of commercial banks and other licensed deposit-taking institutions (DTI) on the island. As such, it routinely monitors their compliance with all the relevant legislation and regulations to ensure the highest level of prudence and integrity in their management. ¹³ As part of its supervisory and regulatory role, the BOJ would be responsible for the distribution of, and access to JamDex.

JamDex was designed to be exchanged with physical cash in Jamaica only on a one-to-one basis, and consumers would be able to use it to make payments anywhere, anytime on any compatible device in Jamaica. Natalie Haynes, chairperson of the BOJ’s Oversight Committee responsible for the implementation of JamDex, explained that the central bank would distribute JamDex to all entities licensed or authorized by BOJ. These were all commercial banks and other deposit-taking institutions (DTIs)—building societies, merchant banks, and authorized payment service providers (PSP). Use of JamDex was free, and banks could not attach any fee to it. Natalie Haynes argued that the following benefits (see Figure 2) would redound to Jamaica:OPEN IN VIEWER

JamDex ecosystem

The primary aim of the BOJ is to ensure JamDex was distributed and accessible to two main groups in the public: consumers and merchants. At the retail level, JamDex represented a two-sided market, that is, the value/adoption of JamDex for customers relies on the number of merchants accepting it and, conversely, the value/adoption for merchants depends on consumer usage. ¹⁵ The ecosystem to support JamDex includes the financial services sector, companies providing and maintaining applications (e.g., digital wallets), and providers of POS devices to initiate and accept payments. Figure 3 refers.OPEN IN VIEWER

The Bank of Jamaica/central bank: Issuer

One of the main reasons the BOJ issued JamDex on the retail side was to improve financial inclusion. They site three main reasons for a national financial inclusion strategy: ¹⁶

(1) Financial inclusion enables the underbanked to better undertake and grow business activities, save safely in the financial sector, manage risks and build financial security.

The BOJ indicated that much has been done to make Jamaica financially inclusive, but the following significant challenges remained. See Figure 4.OPEN IN VIEWER

Commercial banks/deposit-taking institutions: Distributors

The BOJ distributed JamDex to deposit-taking institutions (DTIs) which included commercial and merchant banks, building societies and credit unions. In 2023 eight commercial banks were operating in Jamaica. The National Commercial Bank (NCB) Jamaica Ltd and the Bank of Nova Scotia (BNS) Jamaica together accounted for about a 60% share of the assets and deposits. The building societies sector had been contracting and had only two players, Victoria Mutual Building Society and Scotia Jamaica Building Society. The Credit Sector had experienced significant consolidation in recent years, declining from 48 licensed credit unions in 2007 to 25 in 2020. ¹⁸ By the end of 2023, JamDex was only offered by the National Commercial Bank (NCB). ¹⁹

Digital wallets/application service providers

For banks to distribute CBDC, customers needed to have a JamDex account in a digital wallet, which is different from a regular bank account. BOJ required each commercial bank to develop their own digital wallets at an approximate cost of US$500,000, arguing that commercial banks would recover this cost by efficiencies inherent in the transition to digital currency. ²⁰ These efficiencies included, inter alia, elimination of high courier fees to transport cash to and from BOJ, significant reduction in cost for cash distribution and storage, and reduced cost to insure cash. The BOJ opted not to create a single digital wallet for use by all DTIs, a decision that may have had negative network effects on the adoption of JamDex.

NCB, the only bank adopting JamDex offered it through Lynx, its digital wallet. ²¹ Jamaica’s first digital wallet. Lynx was introduced in December 2021. This payment platform can be used to exchange money, pay for goods and services, top up mobile phones and pay utility bills. Lynx, a fintech subsidiary of NCB Financial Group, had significant growth in its 2-year existence, hitting approximately J$10 billion in transactions, on-boarding 5000 merchants and signing up more than 200,000 users. ²² Other DTIs had announced their intentions to distribute JamDex and develop their own digital wallets but had not published any concrete details. BOJ had the option to provide digital wallets themselves. ²³

Consumers

Customers that already had bank accounts, could automatically get digital wallets. Customers without bank accounts were required to download the digital wallet app to any mobile device and submit simple Know Your Customer (KYC) information. This included name, address, date of birth, tax registration number (TRN), and a valid government-issued photo ID such as a driver’s license, passport, or voter identification card. A self-verification process was used to on-board these unbanked customers. Customers would be able to top-up their wallet with JamDex through authorized agents or smart ABMs and do business using JamDex phone-to-phone with merchants.

To encourage the adoption of JamDex especially for the unbanked, the BOJ offered onboarding incentives. In 2022 BOJ offered an incentive of J$2500 deposit to the first 100,000 customers. The initial uptake was below expectations as only 36,000 customers signed up, so the offer was reduced to 60,000 new wallet holders who didn’t have banks accounts and had signed up using the simplified KYC process. ²⁴

Subsequently a usage incentive was offered to on-boarded customers. A wallet-holder individual Loyalty Program was introduced to provide regular JamDex users with loyalty points that could be redeemed for things such as 2% cashback on qualified purchases. ²⁵

The BOJ had initially suggested that PATH recipients would be paid using JamDex as a means of driving adoption among end users and the unbanked, but this did not materialize.

Merchants

At the retail level, JamDex represented a two-sided market, or a chicken and egg problem where end-user adoption relied on the number of merchants accepting it and, conversely, the merchant adoption depended on consumer usage. Commercial banks were responsible for onboarding merchants and only one bank, NCB deployed JamDex. In addition, it was reported that technical difficulties were hampering merchants’ onboarding. In October 2022, the governor of the BOJ, Richard Byles, admitted to merchant onboarding problems: “Small merchants aren’t a problem, you can use a phone [but] for merchants who have POS machines, and retail systems that tie back into their inventory, the software for that must be adjusted. I will claim responsibility for not assessing that this would be a challenge to overcome. Also, all the ATM machines must be adjusted to be able to dispense CBDC and to exchange it for cash.” ²⁶

Consequently, the BOJ launched the “Small/Micro Merchant Incentive Program,” which offered an incentive to the first 10,000 merchants who signed up for JamDex as of April 1, 2023, with a J$25,000 deposit. Targeted merchants included food outlets, gas stations, hairdressers, and other personal care services. ²⁷ The BOJ also committed funds for a technology service provider to upgrade 10,000 of the more modern POS to accept JamDex quick reference (QR) codes. Jamaica had approximately 50,000 POS machines and the BOJ was willing to form a joint venture with DTIs to finance the replacement of POS machines so that they could accept the JamDex QR code. ²⁸

JamDex headwinds

When JamDex was launched in 2022, Natalie Haynes, BOJ deputy governor with responsibility for banking and currency operations and financial markets infrastructure divisions, exuded confidence in the transformative impact of the digital currency: “JamDex will be a game changer in the country’s digital transformation, by enabling unbanked and underbanked citizens to be a part of the formal financial system thereby enabling access to other financial products.” ²⁹

However, since the launch of JamDex there have been three problems. First, although commercial banks and DTIs had indicated their willingness to adopt JamDex, only one bank, NCB, had a digital wallet issuing JamDex. Despite the BOJ’s changing its position that banks should bear the cost of merchants modifying their POS to accommodate JamDex transactions, no additional DTIs issued JamDex. With only one commercial bank adopting the currency, JamDex’s availability was limited. ³⁰ Was the pricing model and the required investment for wallets and POS upgrades acting as a deterrent to DTIs’ adoption?

Second, merchant uptake was also disappointing. There were technical issues that the BOJ did not anticipate. Many POS machines, especially from larger merchants and ATMs, were not equipped to handle JamDex QR codes. There was the issue as to who should bear the capital cost of upgrading POS and ATMs. Richard Byles, the BOJ governor, believed that commercial banks should undertake these costs as the merchants were their customers. ³¹ After low merchant adoption, the BOJ governor compromised and committed to getting a technology provider to upgrade 10,000 of the more modern machines to support the JamDex QR codes. The BOJ also offered to form a joint venture with DTIs to finance the replacement of old POS machines so they could accept the JamDex QR codes. ³²

Finally, JamDex’s two-sided market also presented challenges. Despite onboarding incentives for banked and unbanked and usage incentives, the low adoption by consumers was attributed to insufficient public education and challenges in onboarding merchants. ³³ This may not fully explain the consumer challenges, as Jamaica had seen an increase in the use of digital wallets. Notably, Bruce Bowen, CEO of NCB— the owner of the only publicly available digital wallet, Lynx—questioned whether there should be continued investments in JamDex: “If you were to look at our CBDC volumes, you would think that Lynx has not been successful. But if you look at the [Lynx’s] overall volumes, it’s been very successful. So, it is simpler for people to use Lynx today without converting to CBDC. And the question that certainly we’ve raised, and there is dialogue going on, is it worth putting a lot of effort into eliminating that friction to use CBDC? Or as an industry and a society, are we better [off putting] that investment into just building the ecosystem?” ³⁴

Decision

BOJ Deputy Governor Natalie Haynes in reviewing the current strategy for JamDex adoption noted that legislation was passed to make the digital currency legal tender, an extensive public education campaign preceded the launch to build awareness, onboarding incentives were initially offered to consumers, and PATH recipients were identified as a use-case to scale adoption in both sides of the two-sided market. The launch strategy was later enhanced to provide merchant incentives integrating their existing POS to interoperate with JamDex. A major concern was the lukewarm response from all DTIs except NCB, threatening the success of JamDex and the Jamaican government digital transformation agenda. Could it be that most DTIs were not convinced that the cost efficiencies forecasted from a reduction in the use of cash were sufficient incentives to adopt JamDex? To that end, Haynes focused on how the BOJ could incentivize DTIs and balance their profit motive against the required investments for wallets and upgrading POS. She noted the following for discussion with her team, in preparation for the meeting with the Minister of Finance and Public Service:

• The participation of DTIs in offering JamDex is discretionary based on the current regulation. Should BOJ change the CBDC regulation mandating banks to support and distribute JamDex as part of their service offerings to promote universal availability? Haynes was aware that forcing banks to deliver JamDex services might clash with freedom of enterprise. The BOJ would have to demonstrate that the required participation serves a legitimate public purpose, is a suitable and necessary means to that end, and does not unduly or arbitrarily burden the private sector beyond what the public interest requires.

There were two major constraints; JamDex as a public good was non-negotiable, and with international scrutiny and political pressure, abandoning JamDex was not an option. What recommendations should Haynes make in her meeting with the Minister of Finance and the Public Service to reposition JamDex?