Collecting Vanuatu’s public revenue through a land value rate would empower the most productive among us, and protect the most vulnerable, raising money more equitably.

Citizens of OECD member countries are accustomed to equating government revenue with taxation of their income and purchases, among other things. But what if this kind of taxation, while accepted as a necessary evil in the West, was actually an impediment to the well-being of a community? What if we could do better, and raise more revenue more fairly from all segments of society?  This is not a far-fetched notion. Economists long ago came to the conclusion that the only fair and efficient means of filling the public purse is not by taxing labour or capital, but by taxing land.

The explanation requires a few steps back.

Over two centuries ago, when the underpinnings of modern economics were taking shape,  people like the French Physiocrats and the British John Locke and Adam Smith postulated that the total value of everything produced in a country comes from the returns on three factors of production:

• Land (all natural resources including agricultural or mineral lands, fishing or water rights, the electromagnetic spectrum, etc.)
• Labour (mental or physical, skilled or unskilled)
• Capital (the physical man-made tools of production including equipment, buildings, any product used in the further production of other things)

All governments need revenue to provide the essential public services and infrastructure needed by a civilised community. What most developed countries do today is collect, via taxation, on the returns of all three factors of production: the rent of the land, the wages of labour, and the profits of capital. 

What may come as a surprise except to some economists is that all forms of taxation – whether on income, value-added, turnover, licensing – have one shortcoming in common: they reduce the supply of labour and capital. This bears looking at in more detail.

Firstly, labour. If one deprives workers of a proportion of what they get from working, they might decide to work less, or try to pass the tax on to their employers or clients by demanding higher wages or fees. This may reduce the effective earnings of the employer or clients who can no longer so easily afford the worker’s output. Taxing the wages of labour diminishes the supply of useful labour and therefore necessarily diminishes the national output of goods and services.

As for capital, assuming that people invest to the extent it is profitable to do so, once a tax on the profits from capital is introduced, investments with smaller margins of profitability will be abandoned. Workers employed in the affected businesses will lose their jobs, depressing wage levels, while the lack of capital will reduce the productivity of other workers. Any diminution in the profits of capital through taxation leads to a withdrawal of physical capital, through abandonment, non-repair, usage past obsolescence and non-replacement.

Where there’s tax there’s shift

People around the world are used to these forms of taxation, and they’ve been levied for a long time by many governments. But their widespread use doesn’t necessarily mean they are an optimal solution for raising public revenue. Because of the distortions they introduce in economic activity, they inevitably inflict some damage on the economy in the form of deadweight loss or excess burden. 

Here’s how that happens: All taxes end up being shifted by businesses and consumers. After a tax is introduced, a whole process of readjustment takes place in economic activity so that the factors of production maximize after-tax rates of return, which will be less than the previous tax-free rate of return on labour and capital.

A lose-lose situation

For example, a doctor faced with an increased tax burden can decide to put up his fees and work fewer hours; his real contribution to the economy is reduced but his income declines less because his fees are higher. The government may collect tax on a portion of his former income but the community still suffers a loss of his contribution. This is a pure deadweight loss – a revenue loss to government and a value loss to the community.

This doctor may also engage in tax avoidance. Instead of altering his real economic output, he’ll seek legal loopholes to reduce his tax burden while continuing to work as much as before. Legal tax avoidance may paradoxically help the economy by limiting the deadweight loss which would otherwise be caused by taxation through withdrawal of labour or capital from active production.

Others opt for illegal tax evasion, which turns otherwise law abiding individuals into criminals, and leads to an attitude of contempt for the law generally and corrupts public morals.

Land doesn’t budge

If taxing the wages of labour or the profits of capital ends in economic damage, then what about taxing the rent of the land?

As the forefathers of economics noted long ago, labour and capital are put to production because of the voluntary actions of human beings. Only land exists and is available for use in production independently of our will. While there is no fixed or automatic supply of willing workers or investment in plant machinery, equipment and buildings, the supply of land is indeed fixed. Land is the only passive, immobile factor of production: it lies, waiting to be used. 

Hence early economists realized that public revenue collected from the rent of land (we’ll call it a “land value rate”) was uniquely efficient and could not be shifted by the landholder through any actions of his own. Indeed, the theorem that a tax on land cannot be shifted was the first theorem ever postulated in economics and remains an oft-forgotten key to crafting equitable tax policy.

“Land value rate” is different from property taxes, which are based on the value of the land as well as the buildings and other property located on it. Property taxes can have perverse effects, as can be seen in cities around the world where abandoned buildings are left to deteriorate by landlords in order to minimize their tax bills while they speculate on a future purchase offer. Valuable land is left unused, an eyesore to the community, when it could be recycled into some other industrial or residential use. 

By contrast, a land value rate is a portion of the value of the land alone, and disregards the value of buildings, personal property or other improvements to real estate. The value of the land is determined by demand, supported by factors such as amenities and location in cities, fertility in rural areas, quality of ore bodies in mineral fields, etc. 

A land value rate is fundamentally a demand by the State for rent to be paid by landholders which represents value being given to them. In this way it’s not really a tax, and so has none of the distorting effects of taxes on labour or capital. 

It can even be said it has an incentive effect on landholders to put the land to best use. Whether they conduct business or farming activities, use the land for their homes, or let someone else use it for a fee, they have to pay the same land value rate to the State. If they don’t do anything, or withdraw the land from production, they still are left with the obligation of paying the rate – or letting someone more motivated use or hold the land. 

Barring tectonic activity, land stays put. As opposed to labour and capital, land is unique in that it cannot be hidden, taken away, or left to rust away. The landholder can effectively do nothing to avoid a land value rate, which makes it uniquely immune to shifting, avoidance or evasion. 
If the landholder fails to pay the rate, the land can be put up for sale to discharge the outstanding land value rate  (the purchaser will pay the debt to get the property transferred). If he pretends that he doesn’t hold the land, the State can simply claim it as vacant and transfer it to another landholder willing to pay for it and to pay the land value rate. Either way, the land value rate gets collected in full.

Tax isn’t everything

When a government imposes a land value rate, what it is really doing is reasserting its sovereign rights over its territory. It is demanding that merchants, manufacturers, miners, plantation owners and others who use its lands or live on them, and are given by the State the right to use them to the exclusion of their fellow citizens, should pay for the privilege.

Many societies have functioned on this model, with the sovereign or the State relying on these non-tax revenues to meet the public expenses. In feudal England, Lords were assigned land in exchange for paying the costs of running the kingdom; the phrase “real estate” originally seems to have come from “royal estate”. 

More recently, the fast-developing economies of the Middle East have collected land rents in the form of oil royalties and have been able to minimise reliance on income taxes. If the royalties on just one natural resource (oil alone) can fund a government, why cannot governments be funded from all the land rents of their sovereign territory? 

A “no public revenue” society is impossible.  Governments need money to provide the essential public services and infrastructure needed by a civilised community. Where these essential public services do not exist and there is, for example, no law and order, wages and living standards collapse along with land values. By contrast, a “no tax revenue” society is not only possible but highly desirable. 
A State can fund its essential public services and infrastructure from the rents of the lands which are made more productive by those essential expenditures, in a virtuous circle of value addition. Such a State has a great advantage in terms of economic development over other countries where labour and capital are taxed. A “no tax revenue” society is achievable because all useful public expenditures and the benefits therefrom are reflected in rising productivity of land, labour and capital and thereby ultimately reflected in land rents and land values.

Benefits for all Ni-Vanuatu

A land value rate would have benefits for all members of the Vanuatu community, by providing both an incentive for production and a social safety net. 

Instead of being locked up forever in the hands of a few individuals and their descendants, the natural resource wealth of the Republic would be held by those willing to put it to good use. They would be constantly nudged by the obligation to pay a fair charge for the use of land, based on its value, thus encouraged to use it, or sell it to someone else who is willing to do so.

However, the rate would only apply to alienated or commercially used lands, such as urban land or commercial plantations, and would spare communal and customary lands which are available to everyone for common use. Many Ni-Vanuatu engage in subsistence fishing or agriculture, and communal land tenure ensures that every member of the community can always provide for himself and not become a charge upon the State. A revenue system should not force people off their lands into urban slums (see Port Moresby for a sad example). Only the exclusive users of lands that are alienated away from communal use would be asked to make a contribution to the common treasury in return for their landholding rights.

Not only is the implementation of a land value rate compatible with the Constitution of the Republic of Vanuatu, it would meet all “guiding principles” set out in the 2017 Revenue Review and in the Terms of Reference for the 2020 Revenue Governance Committee:

• Equity and fairness
• Certainty
• Convenience of Payment
• Economy of Collection 
• Simplicity
• Neutrality
• Economic Growth and Efficiency
• Transparency and Visibility
• Minimum Tax Gap
• Appropriate Government Revenues

Easy to implement

A land value rate is much easier to collect than taxes. The starting point is to build a registry of all land parcels, then to find and regularly update their individual values, ignoring all structures or other human improvements. Real estate sales provide good benchmark values which can be used to extrapolate per square metre valuations. It is also possible to allow landholders to self-assess their land values but on condition that they can be bought out by the State at their own declared valuations with compensation for any improvements as determined by a Court of arbitration.

Once a national land registry and valuation system has been established, each level of government and public utility authority can be assigned its own level of land rate for its own district and for its needed revenues. Thus, a local road or electricity board in an area can set a rate to cover the cost of any required loans for building a new road and get the landholders to contribute through the same revenue collection agency as the national government. 

Each provincial or local authority can have its own autonomy in raising and spending its own money but, by doing it on a common base through a common authority, so that people are not subjected to multiple encounters with tax gatherers.  In a country such as Vanuatu, economy and simplicity in reducing the number of civil servants required for tax collection is highly desirable.  It is far better for a country to collect public revenue from one source competently and efficiently than to try to import a multitude of oppressive and ill-administered income or business taxes based on the uninspiring examples of so-called developed countries.

Reaffirming Vanuatu’s sovereignty

The idea of a tax land rate in Vanuatu comes at an auspicious time. The EU and the OECD have been increasingly pressuring Vanuatu to enforce onerous regulatory requirements and to adopt taxation policies inspired by their own. Their demands are pushing Vanuatu to inflict economic losses on itself in the hope that business activity will be driven away from Vanuatu back to the EU. Whether it will is uncertain, but one thing is certain: the EU will not compensate Vanuatu for the losses.

To be independent means being financially self-sufficient and not reliant on grants or subsidies from other countries. Vanuatu can achieve great prosperity by having a simple, robust revenue system which does not impede but rather propels business, one that can be self-funding by paying for the infrastructure and services which then add value to its lands. 

Aid from foreign governments often comes with strings attached, whether stated or implicit. Advanced economies will have much less leeway to try and dictate Vanuatu policy if the nation doesn’t need their generosity anymore. OECD domestic political problems should not be the problems of other countries and economic advice should not be driven by political considerations. 

As demonstrated since the dawn of economics, everyone in Vanuatu will have more equal access to opportunities and to the use of natural resources if the nation solely collects revenue from the land. For a country that has been sovereign for 40 years, it would be an even more decisive step towards greater economic strength and independence.

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“As blockchain decentralizes financial activities, governments will continue striving to understand and regulate the technology. And those that do so effectively will have an opportunity to attract global investment and become frontrunners in a blockchain economy.”

“Blockchain and the future of finance”, KPMG, 2019

Just a few years ago, the word blockchain was more likely to conjure up associations with fringe tech than serious business. It was first deployed by cryptocurrencies like Bitcoin, whose abstract nature and volatility inspired widely divergent opinion in the financial community, from evangelic worship to blanket rejection. Cryptocurrencies, however, are just one digital asset that can be exchanged using blockchain. And the technology itself is gaining increased traction in mainstream business communities around the world — but not in Vanuatu. Perhaps it’s best to start with a bit of background.

Blockchain is here to stay

Deloitte’s 2020 Global Blockchain Survey reveals that the technology has passed a tipping point and is now “solidly entrenched in the strategic thinking of organizations across industries, sectors, and applications. (…) Leaders no longer consider the technology ground-breaking and merely promising—they now see it as integral to organizational innovation. This year, the C-suite is putting money and resources behind blockchain as a strategic solution in more meaningful and tangible ways”.

Sharing the truth

Blockchain, also known as Decentralized Ledger Technology (DLT), is a digital ledger system where entries are related chronologically and collectively managed by a network of computers. Any participant in the network with the proper authorization can view the entire ledger without relying on an intermediary or any one authority; and data cannot be changed without the approval of other participants. As a result, each and every authorized party in the network has access to a single, shared truth, which fosters confidence in transacting across multiple sites or geographies.

Where there’s truth, there’s trust

The key element behind blockchain’s broad appeal is its ability to inspire confidence in the security of any trade of digital assets — and not just for cryptocurrencies but for anything represented in digital form that has intrinsic or acquired value. These can be digital representations of land, commodities or fiat currency; tokenized debt or equity; or financial instruments or derivatives, with dozens more possibilities on the horizon. The potential is huge in such areas as title documents, patient data, intellectual property and product traceability.

Where there’s trust, trade inevitably follows

In the financial world, we’re already seeing a significant adoption of blockchain. For instance, a group of large banks including Citi, Standard Chartered, HSBC, BNP Paribas and ING are using Contour‘s DLT platform to shrink processing time for trade letters of credit from 5 to 10 days to less than 24 hours.

Global financial messenger SWIFT is talking about deploying DLT-based services for its 11,000+ members. SWIFT cites five benefits: trust in a disseminated system, efficiency in sharing information, complete traceability of transactions, simplified reconciliation, and high resiliency. However, it also notes opportunities for improvement in data controls, standardization, identity management and cybersecurity, among others. 

Other large organizations currently share the same mix of enthusiasm and reservations. But there’s no reason concerns can’t be addressed by technological improvements and regulatory solutions. And that’s already happening.

Building an international regulatory framework

In a Guidance document issued in 2019, the Financial Action Task Force (FATF) clarified how its rules regarding Money Laundering and Terrorism Financing (ML/TF) should apply to “virtual asset service providers”. They included recommendations for monitoring, licensing, customer due diligence, recordkeeping and suspicious transaction reporting. “While virtual asset activities may serve as another mechanism for the illegal transfer of value or funds, countries should not necessarily categorize [them] as inherently high ML/TF risks”, the Guidance document read.

As the main standard-setting body in the fight against financial crime, not only has the FATF never advocated for prohibition of any DLT technology, but it has issued clear guidance on what national jurisdictions could do to address potential risk.

In Vanuatu, plenty of prudence but little progress

As all this suggests, we’re at a tipping point and it’s clearly a matter of time before blockchain gets broad traction around the world. Indeed, jurisdictions that resist the trend may risk their future viability as financial centres.

Vanuatu has not evolved on this issue for some time now. In the fall of 2017, the Reserve Bank of Vanuatu (RBV) “strongly advised” against using cryptocurrencies and deemed them “illegal” in Vanuatu under the RBV act. The Vanuatu Financial Intelligence Unit (VFIU) echoed that statement, adding that a regulatory framework needed to be put in place before the nation embraced digital currency transactions. Under the advice of the Council of Ministers, the Minister of Finance instructed the Vanuatu Financial Services Commission (VFSC) to suspend the granting of Financial Dealer Licenses for blockchain and cryptocurrency dealing and appointed a task force with representatives from the RBC, VFSC and other specialists in the field to work on a “proper legal framework”. 

Almost two years in, we’ve seen negligible progress on this front.

Others are taking the lead

In the meantime, other jurisdictions have charted new territory in innovative regulatory frameworks that seek to ensure proper oversight and control of the trade in digital assets. Over the past three years alone: 

2017

• Gibraltar introduces the Distributed Ledger Technology Regulatory Framework, placing cryptocurrencies under the supervision of the Gibraltar Financial Services Commission. Gibraltar now bills itself as the first regulator to do so. 

• Australia recognizes cryptocurrencies as a type of property and places digital asset exchanges under supervision of the Australian Transaction Reports and Analysis Centre (AUSTRAC), a government body charged with monitoring their compliance with the country’s Anti-ML/TF regulations.

2018

• The European Commission includes virtual asset providers in its Fifth Anti Money Laundering and Terrorist Financing Directive, making them “obliged entities” under Anti-ML/TF regulations. All countries in the European Economic Area fall under this directive, which allows for these types of businesses to operate while properly managing risk.

• Thailand passes the Digital Asset Decree of 2018, establishing the necessary requirements for a business to offer or provide operations for digital assets. The Decree covers cryptocurrencies as well as digital tokens and is overseen by the Securities and Exchange Commission. Three types of licenses are available for Digital Asset Exchange, Digital Asset Brokers, and Digital Asset Dealers.

• Malta declares itself “Blockchain Island” as it opens international applications for Virtual Financial Asset Service provider licenses. Strict government oversight of the location and traceability of involved parties helps reduce the risk of fraud. Malta modeled this approach on its experience with online gambling, where the government had to tighten regulation following early missteps.

2019 

• Singapore passes the Payment Services Act, expanding the regulatory scope of the Monetary Authority to include the offer or issue of digital tokens falling within the definition of “securities”.

• Hong Kong’s Securities and Futures Commission advises operators that digital tokens are considered securities, and any person who markets and distributes them to Hong Kong investors is required to be licensed or registered for Type 1 regulated activity (Dealing in securities) under the Securities & Futures Ordinance (SFO).

2020

• Vanuatu has yet to report any progress.

The time to act is now

As shown above, momentum is building and Vanuatu cannot afford to sit on the sidelines. What’s more, online trading is one of the few sectors where Vanuatu can still grow its services economy, foreign currency inflows, and overall GDP, especially as Covid-19 has gutted our tourism sector for the foreseeable future. 

We all know that for every new business that sets up in Vanuatu, countless jobs are created and sustained through demand for professional services such as accountants, lawyers, IT and real estate. All of which further stimulates the circulation of money.

But why look overseas for examples of DLT’s potential benefits? Last year, Oxfam’s pilot program used cryptocurrency for disaster relief in two Efate villages. So once again, DLT or blockchain is much more than cryptocurrencies. It can make processes more efficient and secure in many areas of society, from healthcare to environment, transport to education.

How to address Anti-ML/TF regulation concerns

There’s certainly a lot of media hype surrounding blockchain, and much of it should definitely be taken with a grain of salt. But as Deloitte’s 2020 Blockchain Survey suggests (see above), the growing interest in DLT from businesses around the world is real. What’s more, it could translate into market share for Vanuatu. The trend in jurisdictions around the world are clear indicators that regulating blockchain, including cryptocurrencies dealing, is in our national economic interest.

Some, like Malta, have issued convoluted state-of-the-art regulations that have notably failed to  attract much investment. But most simply adjusted their current legal systems, especially their Anti-ML/TF regulations, to clarify the status of blockchain services, with an emphasis on the registration and monitoring of digital asset service providers.

Vanuatu’s legislation can be amended to ensure such businesses conduct activities in accordance with our Anti-ML/TF objectives and subject to the same oversight as all other “reporting entities” under the legislation. And it could even be done with advice from FATF and the EU to ensure stronger alignment.

Getting our feet wet

There are low-risk and cost-effective ways for Vanuatu to make inroads in DLT, such as restricting the trade of digital assets to FDL platforms. This would mitigate risk while providing a sandbox for the Vanuatu fintech industry to develop and innovate, giving our authorities time to adapt current regulations for the coming “token economy”. 

Whatever avenue we choose, it’s fair to say that maintaining a moratorium on cryptocurrencies and similar assets is not sustainable — not when these technologies are going mainstream worldwide. It’s time for Vanuatu to look at blockchain from a fresh perspective. Perhaps it’s even time not just to get our feet wet but to actually take the plunge. Our future financial health may hang in the balance.

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Oxfam’s Unblocked Cash project is just the beginning. Let’s take the Vatu to the digital level.

Blockchain-based digital money has been around for about a decade but, due to the sheer volatility of cryptocurrencies like Bitcoin, it’s still often viewed as an obscure geek hobby, or at best some form of online gambling. 

But all blockchain currencies are not created equal. “Stablecoins”, for example, have been created specifically to address issues of volatility and are garnering interest around the world for their potential benefits in replacing or complementing physical money. Other forms of blockchain tokens are reaching outside the boardrooms of tech start-ups and demonstrating their real-life potential for mainstream use, without the risks associated with cryptocurrencies.

No need look further than our own shores for proof. Starting in October this year, residents of Sanma affected by Cyclone Harold can use digital tokens to buy relief goods through Oxfam’s Unblocked Cash project, a partnership with the Vanuatu Business Resilience Council, Australian fintech Sempo and a consortium of 12 local and international NGO and private sector partners.

Ready money

Instead of donations in cash, which in the past have proven expensive and cumbersome, aid recipients are provided with an NFC card topped up with digital tokens. Local shopkeepers are issued a mobile phone with an app to process payments. All tokens loaded into the blockchain by Oxfam are collaterized by actual Vatus deposited at the Reserve Bank of Vanuatu. All transactions are traced in a digital ledger, making it easy to pay back vendors quickly without the need for reconciliation. Every week they receive actual Vatus while the corresponding digital tokens are destroyed. In this way the balance of digital tokens remains the same as that of the collaterized account, keeping the blockchain in sync with the real world.

The Unblocked Cash project, which was piloted last year in the Pango and Melee Mat communities in Efate, clearly sped up relief delivery while reducing costs and ensuring full transparency over transactions. It’s been such a success that it was awarded 1M euros from the European Commission’s Horizon 2020 prize and Oxfam is now planning to replicate it across the Pacific and beyond.

Digital changes everything

This is actually the second significant instance of digital money being used effectively in Vanuatu.  The first was Vodafone’s M-VATU mobile payment system. These deployments may have targeted two specific sets of users (families in need, Vodafone subscribers) for limited use, but it doesn’t take much imagination to see the possible benefits of bringing the technology to all individuals and corporations in Vanuatu for everyday use.

Digital money is a very practical solution to a real Ni-Vanuatu problem. Our country suffers from a highly fragmented domestic payments network which is hugely costly and inefficient and weighs down our economic growth. Having Vatus in electronic form would make everyday transactions easier for everyone wherever they are located. 

With a digital Vatu (a D-VUV? Datu?), there’s no need for bank accounts: the money would live in the blockchain and change hands through a simple smart phone app. People who are less tech savvy or lack an Internet connection could use SMS commands on their push-button phone, or top up the same type of NFC cards used in the Unblocked Cash project. The D-VUV would be easy to use, safer than carrying physical money, and more economical for both buyers and sellers than existing electronic solutions such as point-of-sale systems or wire transfers.

On a socio-economic level, it would broaden financial inclusion to the farthest reaches of our 83 islands, including better access to lending, which would empower consumers and small businesses and contribute to GDP growth. It would ensure economic resilience in the face of natural disasters and public health crises. It would help the government better monitor revenue collection and public expenses, as well as AML/CTF compliance from everyone. It would facilitate e-commerce and digital innovation, and propel our nation onto the front lines of the digital age.

Baby steps

Many other countries have come to similar realisations and are currently exploring options to extend their fiat currency to the virtual realm. 

In a survey of 66 central banks in both advanced and emerging economies last winter, the Bank of International Settlements (BIS) found that 80% of respondents were currently looking at the possibilities of a blockchain-based Central Bank Digital Currency (CBDC), for either wholesale or mainstream use. Some 40% of central banks had progressed from conceptual research to experiments, and another 10% had developed pilot projects.

Some are leading the way. The Bahamas’ “Project Sand Dollar” is a pilot for a general purpose CBDC where the holder would have a direct claim on the central bank, legally equivalent to an account. A key benefit would be to promote financial inclusion over the Caribbean nation’s 700 islands, cays and inlets, which traditional institutions cannot maintain adequate service.

The Eastern Caribbean Central Bank is also running a pilot project for a token-based CBDC in its currency union comprising the island economies of Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Anguilla and Montserrat. Motivations driving the pilot project include payment efficiencies, financial inclusion and the promotion of innovation and inclusive business growth.

Sweden’s Riksbank is also conducting a similar pilot of an “e-krona”, citing a sharp decrease in cash usage in recent years. The Riksbank also takes part in a research group along with the BIS, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank to share members’ experiences and assess the potential cases for CBDC in their jurisdictions.
Meanwhile in China, the government announced in 2019 that it would launch a People’s Bank of China digital currency, starting with a pilot project at the end of 2020. The country’s 1.4 billion inhabitants would make it the world’s leading CBDC.

Central banks have a role to play

At the moment no CBDC has yet been implemented on a national scale, and standards and best practices for such a roll-out have yet to be defined. But these initiatives will eventually lead to public alternatives to the many private stablecoins currently in existence or in development, such as Facebook’s Libra project. 

A speech in May by Yves Mersch, member of the executive board of the European Central Bank, clearly articulated the need for central banks to get in on the blockchain money game. “One implication of financial technological innovation could be an increasingly cashless economy in which people may no longer be able to hold risk-free central bank money”, said Mersch. “Reliable access to money would then hinge on the stability and efficiency of private retail infrastructures. And trust in money itself would rely on trust in the intermediaries that issue private money. This is one reason why central banks keep fully up to speed on financial technological developments.” 

Not only can CBDCs help central banks keep their fiat currency relevant and competitive in a digitized world, they’re better suited to regulatory oversight and consumer protection than privately issued coins.
As noted in a recent report by the European Central Bank (which cited Facebook’s Libra as an example), “to reap their potential benefits without undermining financial stability, we must ensure that stablecoin arrangements do not operate in a regulatory vacuum.” The position is echoed in an IMF analysis: “large technology firms with enormous global user bases offer a ready-made network over which new payment services can quickly spread. Risks abound, however—so policymakers must create an environment that maximizes benefits and minimizes risks.” 

Stability meets initiative

The challenge of course is for central banks to develop the necessary know-how. These venerable institutions are typically not equipped to handle technology selection, app development, brand management, not to mention customer interaction.

One solution floated by the IMF is a “synthetic CBDC” or “sCBDC” where private providers are the ones issuing blockchain tokens on condition that these are fully backed by central bank reserves. The People’s Bank of China for example requires giant digital money providers AliPay and WeChat Pay to do precisely that. Of course, private issuers must satisfy a number of requirements related to AML/CTF and data protection among others. In essence the sCBDC is a public-private partnership where central banks focus on their core function –ensuring trust and efficiency– while private providers are placed under appropriate oversight where they can focus on what they do best: innovate and interact with customers.

Why not here ?

Following that idea, the Vanuatu Reserve Bank could work with the private sector to build a digital money system while underpinning the stability and trust needed for it to work.

The mechanics are proven. One approach would see 100 actual Vatus held in a trust account at the Reserve Bank for every 100 D-VUV issued as digital tokens. Every time a D-VUV is minted on the blockchain, a Vatu is deposited in the trust account; and every time a D-VUV is “exchanged” for an actual Vatu, it’s automatically removed from the blockchain. This is exactly what the Unblocked Cash project is doing, except on a national scale and under control of the Reserve Bank to ensure regulatory oversight. 

Vanuatu should build directly on Oxfam’s initiative, starting by inviting them and their partners to consult on the development of the D-VUV. They have already demonstrated their agility in deploying digital payments in the most difficult environments; they certainly have the competency to make them work in everyday life. And while any hesitancy about the wholesale adoption of a digital currency is understandable, a cyclone has already shown us which way the wind is blowing.

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