Tackling USD Liquidity Drenches in the Caribbean
The Caribbean is plagued by challenges in cross-border payments, stalling trade development across the region. Businesses have limited and slow access to US Dollars. Wire transfers come with high costs, slow transaction times, and accessibility challenges. Even the simplest cross-border transactions become an expensive, slow, uncertain, and bureaucracy-laden exercise.
What does this actually look like for a business?
Let’s look at a Bajan Construction Company
- This medium-sized construction company builds homes, hotels, and industrial facilities across Barbados.
- Presently, it sources most of its building materials from domestic suppliers, paying in Barbados Dollars.
- In an attempt to become more competitive, the company finds a new supplier in Jamaica with higher-quality products at a lower price.
- However, when the company accounts for the cost and administration to pay the new supplier in Jamaican Dollars – it is no longer a viable option.
- To pay the supplier in Jamaica, the company would have to set up a new merchant bank account, provide excessive documentation for each wire transfer, pay high fees and spreads for wire transfers. Sometimes it would even have to queue up to get access to US Dollars.
- A valuable business opportunity has been foregone by the foreign exchange liquidity challenges.
What drives these liquidity challenges?
It’s important to understand why these liquidity challenges exist. They didn’t appear out of thin air. Rather, they are deeply ingrained in the Caribbean’s economic structure. Some key drivers include:
- Lack of Regional Integration: The Caribbean is a patchwork of independent nations, with limited regulatory or economic coordination.
- Illiquid Currencies: Caribbean currencies have very low trading volumes, meaning that banks will charge higher spreads (fees), and a lot of exchange pairs are not even available at all.
- US Dollar Shortages: Trade imbalances and capital controls in the Caribbean often make US Dollars inaccessible.
- De-Risking: US correspondent banks, who facilitate cross-border wire transfers, have cut-off relationships with many Caribbean banks. This makes wire transfers more expensive, less accessible, and sometimes impossible.
Put together, businesses are discouraged from forging relationships outside their home country.
Complementary Currencies – Designed to Create Liquidity
The Caribbean needs a tool that addresses these challenges head-on, driving new liquidity and trade through simple and cost-effective transactions. Complementary currencies, a proven payment vehicle, are the key to solve these problems.
Complementary currencies are privately-issued currencies used by businesses and individuals to transact, operating alongside the national currency. They are often digital, where users can send money with the click of a button.
Existing complementary currencies have seen widespread success in creating new liquidity and trade among businesses: Sardex, introduced in Sardinia in 2010, has facilitated over EUR 81 million in transactions since 2017. WIR, which has operated in Switzerland since 1934 has conducted over CHF 6.5 billion in transactions in 2005. Both have high velocities, a clear signal that these currencies are intensely used for trade.
How do complementary currencies create liquidity? Access to complementary currencies is made as easy as possible, either through a simple system of mutual credits or by providing them as easy-to-purchase currencies. Furthermore, many of them incorporate rules that keep money circulating between users. Finally, they broaden business opportunities for users by providing access to large business networks.
How will the Complementary Currency for the Caribbean work?
Carib$ – the home-grown Caribbean Complementary Currency – will be fully-backed by Caribbean assets. This ensures it maintains a stable value and is fully-redeemable at all times. It will be the first transnational complementary currency combining the experience of the European Union’s Euro with design factors from successful complementary currencies like WIR and Sardex. Further, its unique governance model leverages input from public and private sector stakeholders, to create responsible management of the currency.
Registering, purchasing, and selling Carib$ will be simple and fair. It will be facilitated through a network of Payment Service Providers across the region. CariBizNet – the network of all Carib$ users – will facilitate b2b-business across the whole region. CaribCoin Inc. will provide the necessary technology and a framework for security and AML/KYC regulations.
Altogether this architecture ensures high liquidity, low costs, and fast transfers. Carib$ will significantly reduce the region’s dependence on scarce US Dollars. It will be piloted in Barbados and Jamaica in late 2022, followed by an expansion across the Caribbean.
