Case Study: Sand Dollar (Bahamas)

Background

Why is the Bahamas called the Bahamas? The Bahamas is an archipelago consisting of 700 islands scattered across a vast expanse of ocean; more than 470,000 square kilometers. Hence the plural. The name Ba Ha Ma could have originated in the Taino language of the early inhabitants.

The challenges for payment systems using digital payments or physical cash for such a scattered archipelago are understandable. A compelling reason for the launch of the digital B$, also called the Sand Dollar, is to support a payment system using a liability of The Central Bank Of The Bahamas, the safest form of payment in the Bahamas. In addition, it is meant to improve financial inclusion, reduce service delivery costs and increase transactional efficiency.

The difference between CBDC and cryptocurrency

Sand Dollar is not a cryptocurrency (e.g. Bitcoin). Sand Dollar is a central bank digital currency (CBDC), this means it is a centralized, regulated, stable, private, and secure unit of account and means of exchange. The digital B$ is a direct liability of the central bank, in The Bahamas, backed by the foreign reserves. Cryptocurrencies are private sector issued or minted. While they may be backed by other assets, including central bank currencies, they may not represent the liability of any government or central authority. In some cases, cryptocurrencies may also not be backed by any underlying asset.

The first nationwide CBDC in the world

After a successful 2019 pilot on the island conglomeration of Exuma which reflects the configuration of the Bahamas; the digital B$ was launched according to a tweet from the Central Bank of the Bahamas.

@sanddollar_BS is available nationwide. Become #sandDollar enabled today. Contact these Central Bank supervised, authorised financial institutions for details.#sandDollarOnTheMove #sandDollar #digitalBDollar #cbdc pic.twitter.com/nta1ZIjhij

— Central Bank Bahamas (@CentralbankBS1) October 21, 2020

The sand dollar is the first ever nationwide Central Bank Digital Currency in the world. CBOB has partnered with a number of local financial institutions on the initial rollout, including electronic payment firm Kanoo, mobile money company Cash N Go, and e-commerce platform MobileAssist.

The public-private model: digital wallet, and authorized financial institution

The total GDP of the Bahamas was around $12 billion in 2018, the per capita income is one of the highest in the Americas, with a 90% penetration for mobile devices. In short, you could not have asked for a more ideal ground for the release of the world’s first CBDC; a relatively well-off, scattered population with high mobile penetration.

The project itself is to create a digital currency ecosystem to support digital payments. The main feature is a digital version of the Bahamian dollar. The Sand Dollar will be accepted by any merchant with a central bank-approved e-Wallet on their mobile device. It will also charge ‘negligible’ transaction fees, the regulator claims on its website.

Additionally, an ecosystem consisting of Authorized Financial Institutions (AFI) was created that provide services to the retail customers. This is in the form of KYC/AML checks, wallet services, and custodial services for the sand dollar. AFI includes money transmitter businesses, payment service providers, and commercial banks.

The AFIs can provide their own version of the sand dollar app (after a strict cyber security review) or use the baseline app provided by the central bank. The digital wallets are key components as they interact with retail customers. The wallets are segregated into three tiers. The lowest tier does not require strict KYC/AML requirements and limits the amount of sand dollars held. The other two tiers have a risk based approach to KYC, for retail customers this increases the limits; however higher amounts are taken into the custody of the appropriate AFI. All businesses or payees have to be properly KYCed.

The wallets are secured with multi-factor authentication coupled with a common password and a one-time password. Protections against sim-swapping are not known. A digital identity solution for the Bahamas is also being created in parallel with the Sand Dollar.

Transfer money offline during a natural disaster

In line with serving the underbanked, the CBOB has developed the Sand Dollar to be transferrable via mobile phones, making it easy to use for the residents. It’s usable even while offline, further making it a good payment choice for those without an internet connection.

The offline availability was critical during the CBOB’s development of the CBDC. The regulator’s head of banking Cleopatra Davis revealed that the island nation’s proneness to natural disasters makes this feature crucial. For instance, when Hurricane Dorian hit the island, most people had no access to an internet connection.

Hurricane Dorian, which killed over 70 and destroyed billions worth of property, was a driving factor for the quick adoption of the Sand Dollar. The CBDC was one of the ways the country sought to ‘full-proof’ its financial system against such destruction in the future. The CBOB stated at the time,

Sand Dollar’s mobile phone functionality will mean that the financial recovery aspects of a hurricane can progress more quickly and more safely than would otherwise be the case.