Cryptocurrency is coming to the Caribbean. The digital currency, called CaribDollar (Carib$), is a stablecoin that will be introduced into Barbados and Jamaica by the end of 2022. This was the news by CaribCoin Inc’s chief system architect, Dr Jan Schröder, during a webinar on June 3.
The possibility of using digital currency is a welcomed change in the way commerce can be conducted. In addition to the many benefits of seamless and instantaneous payments enabled by digital currency, Carib$ was touted during the webinar as potentially deepening the Caribbean Community’s Single Market and Economy (CSME) initiative. It seems only a matter of time before Trinidad and Tobago becomes a market for stablecoin.
Before we hop on the crypto train, however, we need to be aware of not just the benefits but also the drawbacks to stablecoin. It is necessary to understand the differences between cryptocurrency and stablecoin, what Carib$ is, why we should be wary about, and how we can ensure it helps rather than hinders economic development in the Caribbean.
Carib$ is a form of stablecoin. Unlike cryptocurrencies such as Bitcoin which is highly volatile and is not centrally owned but instead governed by the masses, stablecoin, as the name implies, has a stable exchange rate that is pegged against stable assets such as the US dollar or the price of a commodity such as gold. The advantage of stablecoin is that the coins are not susceptible to fluctuations within the cryptocurrency space. This reduces financial risk. Carib$ will be managed through multistakeholder governance and public-private partnerships, in close relation with central banks and regulators. According to CaribCoin’s website, Carib$ will be stabilised against Caribbean assets and stabilisation algorithms for the exchange rate.
While Carib$ will go a long way in changing how we conduct business, the “stable” in stablecoin could be misleading. In 2016, the stablecoin company Basis was launched. It pegged its value to the US dollar. In 2018, the company shut down, citing the difficulty of having to apply US securities regulation to their system. More recently, TerraUSD, an algorithmic stablecoin which was supposed to be pegged to the US dollar, collapsed in May 2022. While algorithmic stablecoins maintain a promise to either print or destroy currency to match demand, this approach has been criticised on the grounds that it shares elements with a Ponzi scheme.
The cases of both Basis and TerraUSD reveal a flaw in stablecoin’s model. Because stablecoin’s value is kept stable by controlling its supply through an algorithm, which is a fancy word to say a computer program running a pre-set formula, the digital currency needs demand to maintain value. The algorithm adjusts the price of the stablecoin depending on the supply and demand of investors.
Given Carib$’s similar model of being both pegged against the US dollar and algorithmic, its CEOs should pay careful attention to the fates suffered by the likes of Basis and TerraUSD. There needs to be a much more thorough explanation of the algorithmic structure of Carib$ beyond its vague language of “applying stabilisation algorithms for the exchange rate” and “backing Carib$ with a basket of Caribbean assets”.
To improve the confidence in stablecoin, Caribbean governments can work towards legislation that protects consumers from the risks posed by digital payments. Similar to the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act which was introduced in US Congress, legislation that regulates issuance of digital currencies whose value is pegged against a conventional currency would go a long way in boosting confidence in an emerging digital market of which little is understood.
While legislation for digital currencies contradict the point of a decentralised market, Carib$ will need to be amenable to the fact that consumers are only likely to be more conservative when their assets are susceptible to risk. Stablecoin issues are neither banks nor tech companies: they operate as both and therefore have few rules to guide them.
As much as Carib$ promises to change the face of digital payments and Caribbean commerce, this must be done in a well-thought-out manner that considers all the risks posed by algorithmic stabilisation, in particular, and digital currency, in general.
—Jarrel de Matas is a PhD candidate and teaching associate,
Department of English,
College of Humanities & Fine Arts,
University of Massachusetts, Amherst.