Cryptocurrencies are currently too volatile to be considered an accepted form of payment

WILLEMSTAD – Trends and innovations around payments are happening at lightning speed. New players have appeared in the payment chain, notably FinTechs and BigTechs. At the same time, one cryptocurrency after another is entering the market, while central banks around the world are working on their own digital currencies. The Centrale Bank van Curaçao en Sint Maarten (CBCS) welcomes digitization and innovation and closely monitors new developments. Wherever possible, the CBCS will facilitate market innovations and encourage instant payment use cases. Payments are becoming more user-friendly for much of society, but at the same time the crypto ecosystem is increasing risks for which there are currently not enough mitigations in place.

Cryptocurrencies are digital assets or rights that can be transferred and stored electronically using distributed ledger technology (DLT) or similar technology. With cryptocurrencies, value can be transferred without the involvement of third parties such as banks or clearing and settlement companies. However, the value of cryptocurrencies is not guaranteed and they are mainly used as a means of speculation. The CBCS does not currently oversee (providers of) cryptocurrencies, which means that there are currently no consumer protection regulations in place to help consumers recognize and mitigate the possibility of (financial) loss. if a platform that exchanges or holds virtual currencies goes down or becomes a victim. of cybercrime. The volatility of cryptocurrencies currently makes them unsuitable as a widely accepted means of payment.

Stablecoins (cryptocurrency pegged to a reserve asset like fiat currency, a commodity, or other cryptocurrencies) could contribute to faster, cheaper, and more inclusive cross-border payments, but also come with their own inherent risks. For example, the value of stablecoins is not as stable as the name suggests, as the value of stablecoins can fluctuate. The linking of stablecoins with existing currencies is not automatically maintained. Issuers of stablecoins can hold reserves of the currency to which the stablecoin is linked to achieve a stable value. Stablecoins are primarily used to facilitate the trading of more volatile cryptos. The International Monetary Fund (IMF) does not see a systemic risk to the financial stability of cryptocurrencies because the market capitalization is, although growing rapidly, still relatively low. However, the IMF calls for regulation to match the risks that stablecoins pose as they continue to grow.

The CBCS has been monitoring developments around central bank digital currencies (CBDC) and the crypto ecosystem for a few years. CBCS is closely following developments in the region regarding CBDC, such as the Eastern Caribbean Central Bank pilot project and the CBDC now active in the Bahamas. Although CBDC has been a popular topic in recent years, especially in response to widely accepted stablecoin proposals, the number of live CBDCs around the world is still limited. This illustrates the complexity of CBDC projects and central banks’ hesitations about the maturity of the systems needed to support CBDC initiatives. For 2022, the CBCS intends to publish a position paper on the CBDC’s potential contribution to financial inclusion in Curacao and Sint Maarten.

In response to these exciting new developments, the CBCS has proposed a set of 4 pieces of legislation which are in the legislative process and which should help new technologies and improve the efficiency of the payment system. These laws impose requirements for the oversight of electronic payment infrastructures and institutions, as well as rules and frameworks for digital assets. This will ensure that companies that offer exchange services between virtual money (cryptos) and regular money (fiat money) and companies that offer crypto custodial wallets, will be under the conduct and the integrity of the CBCS.

Consumers should be aware of the highly risky and speculative nature of cryptocurrencies, misleading advertisements and social media influencer campaigns. The CBCS aims to protect consumers through the aforementioned draft legislation, by requiring that any information provided by any potential service provider (including those dealing with virtual assets) be correct, clear and not misleading. Any service provider must act in the best interest of its customers and consumers by refraining from any behavior prejudicial to the confidence in the service provider itself, the payment system and the integrity of the financial system of Curaçao and Sint Maarten.

Ultimately, the CBCS has a mandate to ensure a secure and accessible payment system. The CBCS aims to develop policies that support innovation while ensuring compliance with international standards that also support important policy objectives such as market protection, resilience, financial stability and market integrity. Accordingly, the CBCS will continue to monitor developments in the crypto ecosystem and will reassess this topic periodically.

Errol Cova is responsible for governance, compliance and oversight of the conduct of the Central Bank of Curacao and St. Maarten.

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