Bahamas central bank shares CBDC lessons from Sand Dollar’s first two years

This article first appeared on the Global Government Fintech Blog.

The governor of the central bank behind the one of the world’s few live central bank digital currencies (CBDCs) has highlighted a quartet of lessons learned as its circulation remains ‘less than one per cent’ of currency issued.

The Central Bank of the Bahamas (CBB) launched the Sand Dollar just over two years ago. Despite the archipelago nation’s small size – its total population is only about 400,000 – its status as a CBDC pioneer means its experience is being closely followed digital currency developers and policymakers worldwide.

In a speech via video-link to a conference in Brussels, the CBB’s governor John Rolle described four factors that the Bahamas’ experience suggests are particularly important – and that remain important to its own efforts to encourage CBDC adoption. Those factors are: building a network of merchants that accept and encourage CBDC use; achieving interoperability with the traditional banking system; enlisting participation from the traditional banking sector and credit unions; and the importance of “user education” and “inspiring user confidence”.

Efforts to encourage adoption of the CBDC – which is valued 1-to-1 with the Bahamian dollar, which is itself pegged to the US dollar – are “still in the very early stages”, Rolle said. The CBDC’s relatively modest take-up to date, however, “understates public interest because e-money issued by non-banks is also present… and we anticipate that such balances will convert to Sand Dollars as the cross-platform movement of funds increases,” he told the audience.

“E-money penetration is also still low,” Rolle said. “In a population of less than half a million, it is estimated that no more than 20 per cent of adults use e-money wallets [and] these individuals only make low frequency, low value use of such mobile wallets. All of such wallets now, however, have access to Sand Dollars. That compares to about no more than 70 per cent of adults in the Bahamian population who engage more frequently, and at higher average transactional values, in retail payments with credit and debit cards.”

Merchant drive ‘beginning to accelerate’

The Bahamas – which spans 700 islands located southeast of Florida and north of the Greater Antilles – launched the Sand Dollar in October 2020, with motivations including improving financial inclusion, benefits to the government from ‘improved expenditure and tax administration systems’ and achieving cost savings by reducing cash usage.

In terms of expanding the number of merchants accepting the CBDC, Rolle said efforts are “beginning to accelerate through direct outreach to the business community, with education focused on the benefits of reducing physical cash in commerce.”

The CBB is to add more features to the next version of the Sand Dollar’s ‘core application’ to allow financial institutions to “seamlessly structure and manage merchant fee arrangements,” he informed the conference audience. “The central bank provides an off-the-shelf application that payment providers can use to provide wallet services to the public even though, in many cases, those providers use their proprietary systems. We are going to be tailoring the standard app so that more services can be provided and allow financial institutions to focus more on other innovations around payments. For merchants, more access to basic data analytics will also be featured in the core application.”

The second lesson he described from the CBB’s experience is “the importance of achieving interoperability with the traditional banking system, particularly for […] merchants who need to treat CBDC revenue like any other form of receipt,” he continued. He said the central bank had completed a ‘two-way linkage’ through the Bahamas Automated Clearing House and “this solution is now being released for financial institutions to build it into their proprietary interfaces with the digital currency.”

In terms of enlisting participation from banks and credit unions, Rolle said that “one of the six retail banks has already began to pilot the system” and that “one of the largest of the five dominant credit unions has completed the technology systems assessment to become a provider of Sand Dollar wallets”. He said the central bank “has had to manage this process within its own staffing capacity in terms of the sequencing of engagements with banks and credit unions.”

For the fourth lesson – awareness and trust in using Sand Dollars among the general population – Rolle said that “messaging is being crafted to inspire user confidence, especially around data protection, cyber security and ease-of-use”.

Connecting with government payments

Developments related to the Sand Dollar are also being recorded in the central bank’s annual reports.

The CBB’s 2021 annual report (published in May 2022) records that at end-2021 Sand Dollars in circulation stood at $0.304 million (about £263,000), an increase from $0.08 million the previous year.

The annual report also notes progress including the integration of a ‘number’ of government agencies into the Sand Dollar ecosystem, as well as the appointment of a PR company to promote the Sand Dollar.

In terms of government agencies’ use, the report states that the CBB ‘continued its collaboration with the government to use Sand Dollar as a method for collections and disbursement of payments… this focused on enabling digital currency receipting on the Government’s DigiPay platform, and planning around phased acceptance of payments at various public-facing services outlets’.

In respect of promotional activity, the report states that Covid-19 ‘continued to impact the Bank’s ability to launch any major form of in-person promotions or marketing efforts’ for the Sand Dollar during 2021. But that a local PR agency had been hired to ‘strategise and co-ordinate on initiatives to encourage Sand Dollar adoption’.

Internally within the central bank, which is based in capital Nassau, a newly established Financial Markets Infrastructure (FMI) Unit took on increased responsibility for Sand Dollars during 2021 ‘as the Currency Department builds up capacity to assume full responsibility for the digital currency’. An important legal development was that the Bahamian Dollar Digital Currency Regulations (2021) were gazetted and became law in November 2021.

Rolle was speaking at a conference titled ‘Towards A Legislative Framework For A Digital Euro’ co-organised by the European Commission and the European Central Bank on 7 November 2022.

This article was prepared by the author. The views expressed in this article are the author’s own and do not necessarily reflect the views of the Digital Euro Association.