digital currency

Piloting new regulations: Mauritius moves towards a Central Bank Digital Currency

Share on:

Mauritius is gearing up to introduce a Central Bank Digital Currency (CBDC), and all eyes are now on the Bank of Mauritius (BoM) as it prepares to bring this innovative project to life.

In early 2020, the BoM Governor Harvesh Seegolam, speaking at CoinDesk’s Consensus: Distributed virtual conference, noted that the banking regulator would soon make announcements in relation to the potential introduction of a retail focused CBDC. This thrust was cemented when the Finance Minister noted in his 2020-21 Budget speech in June 2020 that several new products would be introduced to further enhance the competitiveness of our financial services sector, one being the CBDC.

Subsequently, in the MAFH webinar on digital payments in post-COVID Mauritius, held on 30 July 2020, Aswin Ramduny, Chief of Payments Systems at the Bank of Mauritius, noted that the central bank is turning to the CBDC “to move all participants in the ecosystem towards digitalisation”. He explained that this would be in line with the experience of many central banks around the world that are fast tracking the adoption of CBDC, especially in Europe.

Towards an enabling regulatory regime

In view of the Government’s drive to create a CBDC, a raft of regulatory changes were introduced in the Finance Act 2020 to include a new definition of a “digital currency”, to clarify that this can only be issued by the central bank, and that the central bank shall determine its denomination, design, form and manner, with the concurrence of the Minister. The Finance Act also provides that currency issued by the central bank, including digital currency, shall be legal tender in Mauritius.

Commenting on the implications of this new regime, Managing Director of Digital Associates and FinTech lawyer Jessica Naga says, “Regarding the CBDC, unlike most jurisdictions, Mauritius has already addressed the biggest monetary law and policy question. Mauritius is no longer debating whether it will or will not have a CBDC and how the right to issue CBDC should be framed.”

She suggests that there are two main forms that CBDC could take, namely account-based or token based.  Jessica says, “A centralised account-based CBDC will be easier to implement and control for the BoM. As the law stands, the BoM can already open and maintain accounts for financial institutions, such as banks, but also for individuals such as the Governor, Deputy Governors and members of the staff. With a relatively slight change in the law, opening and maintaining of accounts for the general public and corporate entities could be possible, should this be desired. Therefore, as far as the legal framework is concerned, Mauritius is ready to launch its CBDC.”

Flexibility as a watchword for the new framework

A CBDC, depending on the design chosen, could offer many, if not all, of the benefits of cryptocurrencies but at the same time temper many of the negatives and would, importantly, still allow central banks to roll out national strategic monetary policies. However, Jessica explains that separately, the popularisation of cryptocurrencies should not be curtailed. “Cryptocurrencies offer, for example, a natural counterbalance in countries facing hyperinflation, irrespective of the reason for this. We have seen citizens of Venezuela and Argentina use cryptocurrencies to fight local hyperinflation and we are seeing a similar trend in South Africa.” she says.

Jessica further adds that “in such a new and fast moving environment, and because CBDC is very much in its conceptual phase, the legal framework needs to be flexible, make provisions for a trial phase, be put under the active supervision of local regulators and allow CBDC and traditional national currency notes and coins to run alongside cryptocurrencies to reach a natural balance, in the interest of many, as they complement each other and fulfil counterbalancing functions.”

Addressing AML issues and FATF guidelines

International standard setters and regulators are already taking a keen interest in digital and crypto currency initiatives, and the FATF prescribed its recommendations on cryptocurrency regulation on June 21 2019, with Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. According to this FATF guideline, Virtual Asset Service Providers must apply a risk-based approach and risk-assessment like other financial institutions. Countries that are members of FATF are responsible for the implementation of these measures and are expected to ensure the transparency of virtual asset transactions and keep funds related to crime and terrorism away from the crypto industry.

Dr Chiragra Chakrabarty, CEO of Katic Consulting and a former Director at the BoM, said, “the idea of issuing central bank digital currency or Digital Fiat Currency (DFC) must have been studied or researched well by Bank of Mauritius, so that in the future when they want to offer a formal/legal substitute for the consumer that is trusted and protected by central banks.”

He adds, “DFC is, at its legal core the digital equivalent to physical currency. There are two broad approaches to implementing a DFC system: a direct access approach through accounts at the central bank, and a token approach through in independent wallet network. These models could be adopted separately or combined in a hybrid approach. I am not sure which model BoM will adopt in the future.”

While there will be many regulations, Dr Chakrabarty underlines that “criminals exploit money service businesses (MSB) at all stages of the money-laundering process. Given such risks, AML regulations are an integral part of digital currency applications. Addressing these needs requires consideration at the ICT-level, as well as the financial regulatory level. This is because FinTech applications are built on the design and development of ICT platforms.”

Partnering with the private sector

In China, a country where digital wallets like Alipay and WeChat Pay have seen widespread adoption, the central bank is already partnering with a handful of private sector companies to trial an electronic currency which it has been working on for a number of years. Meanwhile, Sweden’s central bank is working with consulting firm Accenture to pilot its proposed “e-krona” currency. In Mauritius, it is anticipated that private companies will be happy to collaborate with BoM.

“The BoM has to take utmost care while selecting its partner(s). In my view, a joint initiative is the best approach to move forward, although the ownership of DFC remains with BoM. The terms ‘CBDC’ and ‘DFC’ are used interchangeably. However, the term ‘DFC’ can be broader, encompassing a wider range of potential institutional arrangements,” says Dr Chakrabarty. He considers that the DFC/CBDC should be distributed through the established banking system and issued by the central bank to avoid the risk of destabilizing the financial system.

Bringing the benefits to all segments of the population

Lord Meghnad Desai of the Official Monetary and Financial Institutions Forum (OMFIF) and Greg Medcraft of the Organization for Economic Co-operation and Development had discussed the different needs and considerations central banks have to focus on for CBDCs. Desai said these considerations need to include the fact that poorer populations may prefer cash and make heavy use of international remittances.

Elaborating on this, Dr Chiragra concluded saying, “I think it is a very valid point and hence it makes my argument of indirect access approach stronger. This approach will help all segments of population either to convert into physical currency and for cross border payments. While real-time, cross-border payment settlement is the future, today the primary concern of policymakers is crisis prevention. I agree that central bank needs to be more proactive in terms of cross border payment as it can be in various forms.”

While the precise shape of the CBDC remains to be seen, there is no doubt that its launch in Mauritius will demonstrate the island’s clear commitment to becoming a hub for financial innovation on the global stage and to bringing real benefits for its citizens.