In October 2020, the Bahamas launched its central bank digital currency (CBDC), called the “sand dollar”. The sand dollar project has been greatly praised, described by PwC as the “world’s most mature CBDC”. An article published by the Official Monetary and Financial Institutions Forum described it as a “groundbreaking innovation” and according to the Central Bank itself, “The Bahamas is considered a global leader in CBDC development”.
While many pundits point to developments in China as an example of technological advances in fintech, the example of the sand dollar may be more relevant to much of the rest of the world. The Bahamas is a democratic, developed, free-market economy. Like in most developed nations, the central bank publishes regular and accurate data about its balance sheet. Data that provide a genuinely objective and hype-free view of the success of the sand dollar.
To consider the currency’s success, it is worth stating the basic questions that are so often forgotten by those who write about fintech:
- Is there a clearly defined problem to be solved or opportunity to be exploited?
- Is the problem worth solving?
- Is there a clearly defined solution for the problem?
- Is there evidence the solution was an improvement on the status quo?
- Are there alternative solutions that may be a better fit?
The fundamental problem addressed was financial exclusion, particularly in the more remote parts of the archipelago that makes up the Bahamas. A Central Bank of the Bahamas report in 2019 stated: “Although average measures of financial development and access in the Bahamas are high by international standards, pockets of the population are excluded because of the remoteness of some communities outside of the cost-effective reach of physical banking services”. The main proposed benefit was “financial inclusion – improved access to digital payments for the unbanked and underbanked.” The general theme that there were pockets of financial exclusion in more remote areas of the Bahamas has continued throughout communication about and analysis of the sand dollar. Initial analysis also claimed potential benefits in a wide range of areas including reduced transaction costs, faster transactions, reduced tax evasion, and more effective information gathering by the government.
Reviewing the data gathered before the initial pilot and subsequent research does not strongly support financial inclusion as a reason for introducing a Bahamian CBDC. The initial pilot for the sand dollar was on a group of islands called Exuma (part of the Family Islands). The research did not show that exclusion from the financial system was particularly problematic by global levels. Ninety-three per cent of Exumans had some form of deposit account and 90% had a debit card. In South Korea (which has a similar level of GDP per head) 94.85% of people aged 15 or over had a bank account or an account at a mobile money provider. In the US and UK, 95% and 97% of adults respectively have bank accounts. The percentage of Exumans holding accounts was shown to be lower that the Bahamian average by subsequent research, which estimated 94.3% of Bahamian adults had some kind of account. The group with the lowest rate of account ownership were those aged 55 and above. Those most typically resistant to using digital payments.
The sand dollar was a clearly defined solution to the problem of lack of access to digital payments. The majority of the population were made aware of it and starting a digital wallet was a straightforward process. However, the real problem arose when measuring the impact of the Bahamas CBDC. A paper published this year by the central bank claimed to have “determined that there is a positive correlation between CBDC and financial inclusion.” It also described an “adoption rate” or “roughly 7.9%”, with 32,736 wallets having been created. The picture is not quite so positive in an IMF (International Monetary Fund (IMF) report published in May this year, which claimed that “the CDBC currently makes up less than 0.1 per cent of currency in circulation and there are limited avenues to use the sand dollar”. However, it was still generally positive about the sand dollar and its “potential to help foster financial inclusion and payment system resilience.” Going on to recommend that the central bank, “accelerate its education campaigns and continue strengthening internal capacity—including on cybersecurity—and oversight of the CBDC project to safeguard financial integrity.”
Reviewing the monthly data from the Central Bank of the Bahamas on their assets and liabilities shows a painfully slow rate of adoption and much lower proportion of currency in circulation than even the IMF indicated (Based on the June 2022 data, a more accurate value would be 0.0631% of currency in circulation). There was a brief period of fast growth in mid-2021 (as shown below) but it was from an extremely low base and seems to have levelled off.
