Saturday, January 17, 2015

Will the New US Relationship with Cuba Create the First Cashless Society

Looking at the new rules for US citizens traveling to Cuba prompts questions about what a remittance is or if access to money is the same as money. Can a US traveler to Cuba give a potential local business associate a payment card with an associated large value limit? Can a US traveler create an account on an African phone and fund it with large value and give it to a Cuban national for business development purposes? Do US citizens need to take such steps at all since US banks can now create Cuban correspondent accounts and thus effectively create gross real time payment access (although “real time” may be a bit optimistic in this case)? Will the Cuban tourism industry now accept payment cards issued by US financial institutions (FI)?

The Cuban Government intends to unite its dual currency system and make other reforms. However, requiring Cuban FIs to comply with BASEL II, instituting a large value real time payment system, or a deferred netting system (regardless of the periodicity of settlement), and generally providing a financial infrastructure allowing Cuban citizens to amass wealth from outside sources will not sit well with revolutionaries in Havana. Perhaps the distrust of the capitalist system that fomented the Castro Government will lead to the development of a new type of fiat currency and a new type of payment system that will resolve several issues at once.  

Instead of forcing business to exchange foreign currency to Cuban Convertible Pesos the government may allow their citizens to keep the currency in their original denominations if the government can pool that money into an account and issue digital currency strictly backed with the foreign reserves. Effectively such a system will give Cuba three types of currency, but likely not for long. The limiting factor of such a system is the availability of modern cell phones and other like equipment capable of storing, transmitting, and receiving digital currency securely. If the Cuban government promotes the ubiquitous flow of digital currency backed with hard fiat currency then the creation of a cashless society may be a step away. The Cuban central bank issues and redeems the digital currency; there is no foreign exchange (since the issuance is in the currency pooled at the central bank); the other two Cuban currencies will quickly fail to be used and be converted to the digital currency as fast as the foreign currency is amassed.

The Cuban Central bank redemption activities will soon dwindle to nothing and once both versions of pesos move into a digital form then there will be no impetuous to keep any non-digital currency at all. Certain activities such as insuring that all Cuban citizens have access to a personal electronic wallet; making clear transparent regulations on the audit of foreign currency pools; and limiting the power of the government severely to revoke the certificates embedded in digital currency will ensure the success of the endeavor and make the Cuban cashless society the envy of modern governments worldwide.

Next Blog: Contraband: the destroyer of a cashless society

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