Sand Dollar (Bahamas) digital currency: A beginner’s guide

What is the purpose of a central bank digital currency (CDBC)?

The central banks around the world got concerned about the rapidly expanding demand for cryptocurrencies because it might entirely undermine their monetary policy. After all, the value of crypto assets depends only on the assumption that people would value and use them in contrast to fiat currencies, which are supported by monetary policy and their status as legal tender. As a result, price volatility has been significant since the valuation of crypto assets is mainly based on unsupported ideas.

Furthermore, short-term interest rates are often established by central banks in the interbank market for reserves to conduct monetary policy. For example, financial institutions use the global interbank market to transact directly in currencies and other currency derivatives. 

Exchange-traded funds (ETFs), or currency derivatives, derive their value from the currency that serves as their underlying asset, and at a predetermined date and rate, the investor purchases or sells a predetermined quantity of fixed currency. With cryptocurrencies dominating the financial services industry, central banks would lose their power to implement monetary policy if they were no longer the sole supplier of such reserves.

Related: How blockchain can transform government sector: E-government, e-voting, e-identities and e-documents

In addition, if economic activities (e.g., manufacturing, buying and selling goods and services) start using crypto assets and discard central bank money as their unit of account, then the central bank’s monetary policy is no longer relevant. So how can central banks prevent crypto assets from putting pressure on fiat currencies? 

Implementing central bank digital currencies (CBDC), or fiat currency in digital form, is an effort by central banks to stay competitive in a decentralized economy. For instance, by adopting the Sand Dollar on October 20, 2020, the Bahamas became the first nation to deploy a national CBDC. With CBDCs, central banks can continue to be relevant by offering more reliable and stable units of account than crypto assets and by making central bank money appealing as a form of payment in the digital economy.

This article will shed light on the Bahamian CDBC, what the Bahamian Sand Dollar is used for and the purpose of the Sand Dollar.

What is the Bahamian Sand Dollar?

Since the late 1960s, the Bahamas has been a cash-dependent economy. Following the Bahamas’ 1973 separation from Great Britain, the Central Bank of the Bahamas (CBOB) was named the nation’s official currency issuer and assumed control of monetary policy by 1974. Since then, Bahamians have been offered access to an improved version of banknotes and coins. So why did the Bahamas create a digital currency?

Until 2019, Bahamians’ preferred mode of payment included cash and coins. However, due to the outbreak of the COVID-19 pandemic, former Minister of Finance Hon. Peter Turnquest disclosed the need to accelerate the adoption of digital payment systems. As a result, the Bahamian penny was phased out of circulation in December 2020, while the Sand Dollar, the digital currency issued by the central bank of the Bahamas, was introduced in October 2020. 

The Sand Dollar is a digital version of the Bahamian dollar (B$), which hopes to promote comprehensive access to regulated payments and other financial services for the nation’s underbanked and unbanked populations. The central bank expects to boost transactional efficiency for financial services and lower service delivery costs across the Bahamas by introducing this retail central bank digital currency.

The Bahamian dollar, the national currency of the Bahamas, is 1:1 pegged to the United States dollar and the Sand Dollar is pegged 1:1 to the Bahamian dollar. However, the CBOB is directly liable for the Sand Dollar, which is backed by its foreign exchange reserves. Additionally, the digital version of the Bahamian dollar can serve both as a wholesale and retail CBDC.

Financial institutions that have reserve deposits with a central bank can use a wholesale CBDC, whereas retail CBDC is for the general public. In the case of the digital Bahamian Sand Dollar, wholesale applications would often be limited to interbank payments settlements or clearing house transactions and the public could send and receive digital payments using the proposed retail application. 

Moreover, each holder would continue to have direct claims against the central bank and formally have accounts there, leading to a hybrid CBDC, where the CB holds the retail balances. Since banks and payment service providers (PSPs) represent the central bank, funds held by retail clients at the Bahamas central bank are not disclosed on the balance sheets of the authorized financial institutions (AFIs).

History of the Sand Dollar project

The Bahamian Payments System Modernization Initiative (PSMI), which started in the early 2000s, included the Sand Dollar project as one of its goals to increase financial inclusion and ensure equal access to financial services by increasing the effectiveness of the domestic payments system.

Exuma hosted the first launch of the Sand Dollar pilot in December 2019 and Abaco followed in February 2020. A focused baseline survey on financial inclusion and access was carried out for Exuma in the summer of 2019 before the pilot’s introduction, demonstrating high mobile phone usage and a likelihood that Bahamians would be willing to use digital financial services.

Furthermore, Abaco, which Hurricane Dorian had ravaged in September 2019, received an extension of the pilot to test the ground for emergency wireless communications capabilities for financial services recovery.

How does the Bahamas Sand Dollar work?

To handle financial transactions, the Sand Dollar required a technical platform. The central bank of the Bahamas chose NZIA Limited as the Sand Dollar technology implementation partner to create and build a digital version of the Bahamian dollar. Through a collaboration with the law firm Norton Rose Fulbright, a hybrid technology solution was paired with risk, legal and policy knowledge, possibly introducing the cutting-edge CBDC system.

Project Sand Dollar’s central command and control application, Cortex, offers start-to-finish management capabilities for all facets of the issuance of central bank digital currency:

• Movement
• Compliance
• Ecosystem engagement
• Risk management
• Usage
• End-user accessibility

Bahamian consumers require a prepaid Mastercard to pay with the Sand Dollar, and they can choose Tier I eWallet or Tier II eWallet. The holding limit for Tier I eWallet is $500 and for Tier II eWallet, it is $8,000. The monthly transaction limit is $1500 and $10,000 for Tier I eWallet and Tier II eWallet, respectively. Digital wallets can be accessed through a physical payment card or mobile application.

Moreover, there is no official identification needed to open a digital account because Tier I or basic wallets are for users who do not need to undergo any consumer due diligence procedures. On the contrary, premium or Tier II wallets require risk-based identification checks to be completed before onboarding a customer. In addition, Tier III wallets for businesses, charities, or other corporate entities with no preset transaction limits are also available. 

Therefore, transactions can be completed immediately between the eWallets of the payer and the payee because the prepaid cards or digital wallets hold central bank money and are based on distributed ledger technology.

Main features of the Bahamian Sand Dollar

With the aim to enhance access to financial services, the Sand Dollar project focuses on the “Inclusive, Convenient, Secure” tagline. In addition, Hurricane Dorian also pushed the CBOB to strengthen the Bahamas’ financial system. 

The key features of the Sand Dollar are listed below:

• Legal tender: The Sand dollar is backed by the foreign reserves of the central bank and is a direct obligation of the CBOB. It can be used for both retail and wholesale applications.
• No anonymity: Despite having a token-based structure, the Sand dollar does not support anonymity. 
• Client-facing customer service: The CBOB does not offer front-end customer support or directly sponsor digital wallets as part of the Sand Dollar project. However, the CBB keeps track of each individual’s digital currency holdings in a ledger.
• Supports offline functionality: When communications access to the CBDC network is interrupted, blockchain technology offers offline support even if connectivity between the islands is discontinued. The updated digital wallets are made available once connectivity is restored.
• Multi-factor authentication: The Sand Dollar project offers multi-factor authentication for a digital ID solution and wallet users using identity features and Know Your Customer (KYC). 
• Interoperability: All payment processing businesses will have access to digital currency and be able to settle retail Bahamian dollar payments through the Sand Dollar Network.

How to buy the Bahamas’ Sand Dollar?

Customers can enroll with CBOB-supervised financial institutions, i.e., AFIs, that are authorized Sand Dollar agents. AFIs, including Omni Financial Group Limited, MoneyMaxx, Island Pay, SunCash, Cash N’ Go, Kanoo Pays and MobileAssist, can onboard customers using their customized applications, also called digital wallets. 

Steps to buy or enroll for the Sand Dollar are listed below:

• Select and get in touch with your preferred Sand Dollar-enabled AFI.
• Choose the purpose from the choices offered, such as business or personal-I, personal-II. Business wallets are offered for commercial purposes, personal-I can be used by non-residents/unbanked/visitors and personal-II wallets are reserved for Bahamian residents.
• Provide the necessary KYC information for due diligence purposes.
• Download the proprietary eWallet from your chosen authorized financial institution and adhere to their specific instructions.

But how can a business become Sand Dollar-enabled? Enrollment steps for merchants are similar to individuals except that they must select “Business Wallet” from the offered choices. The holding limit for merchant wallets lies between $8,000 and $1,000,000 with an unlimited annual transaction cap. When enrolling, merchant wallets must provide a value-added tax (VAT) certificate and a valid business license to be linked to a bank account. 

CBOB Sand Dollar vs. ECCB DCash 

The Eastern Caribbean Central Bank (ECCB) securely minted a digital version of the Eastern Caribbean dollar as legal tender as part of the DCash pilot project. The Eastern Caribbean Currency Union's (ECCU) monetary authority, the ECCB, will continue to be responsible for the production, distribution and redemption of DCash.

The DCash pilot's development and testing phase began on March 12, 2019, with five participating islands, including Antigua and Barbuda, Saint Lucia, Grenada and St. Kitts and Nevis. However, using a distributed ledger technology (DLT) created by the technology provider Bitt, the member countries’ rollout and implementation began in March 2021.

The DCash pilot aims to address issues such as the high costs associated with current payment options, banking services, managing and issuing cash and ineffective cheque settlement procedures that slow down business operations. Although sounding similar to the Sand Dollar, both projects are different in various aspects as listed in the table below:

The future of the Sand Dollar

Building a CBDC solution in the unexplored territory by examining the needs of the Bahamian population was a necessary step taken by the CBOB to improve financial inclusion and access to financial services in the Bahamas. 

The Sand Dollar has developed into one of the first examples of a blockchain-based central bank digital currency with widespread adoption among businesses, financial institutions and customers in less than a year. 

However, according to a study by the London School of Economics, Sand dollar balances increased by less than $300,000 between January 2021 and June 2022. In contrast, the value of notes increased by $42 million, indicating that the Sand Dollar hardly qualifies as a means of payment and the need to educate Bahamian residents about the usage and benefits of digital payments.

Last but not least, unless there is an objective examination of alternatives, adopting an advanced technology may not prove productive in the long run for policy-making or commercial investments. Regardless, the Sand Dollar digital currency is still an immature project that will require continuous improvements in Bahamian payments and banking infrastructure in order to become a widely adopted CBDC.