Sand Dollar CBDC – #1 Most Influential Project of 2021 in Finance

The people and businesses of the Bahamas are spread across roughly 30 islands in the Caribbean—and the nation’s banking system is just as fractured as its geography. With a declining number of brick-and-mortar banks, the government must ship large sums of cash to its smaller islands so businesses and residents can pay their bills. But transporting and managing all that physical currency across a vast area of ocean can get expensive. The process also shuts out some residents from the most basic financial services. And it adds another layer of risk for businesses, leaving their physical money vulnerable to theft.

So the Central bank of The Bahamas launched a four-year project to create and deploy a digital version of the Bahamian dollar. When the Sand Dollar debuted in October 2020, it became the world’s first government-backed, blockchain-based digital currency.

Along with difficulties in moving money around, the Bahamas’ financial system has been further challenged in recent years by economic downturns and natural disasters, said Kimwood Mott, the project manager who led the implementation of Sand Dollar at the Central Bank of the Bahamas, Nassau.

With Sand Dollar, citizens can receive and make payments electronically from a digital wallet using either their mobile phone or a physical payment card they can manage via kiosks across the country. And because it’s issued by a central bank, Sand Dollar has the same financial protections as the country’s legal tender.

Banking on Buy-in

Unlike cryptocurrencies that are decentralized and anonymous, central bank digital currencies (CBDCs) are extensions of government-issued fiat currency. That made developing and launching Sand Dollar a highly complex endeavor that required buy-in from myriad entities.

“This is a special project because while we at the Central Bank are building out the core payment platform, we do have some integration with other financial institutions and other major financial players, such as the government, commercial banks, clearinghouses and the like,” Mott said. “They had to do their part as well.”

After launching the project in 2018, the team began a pilot in 2019 using 48,000 Sand Dollars on the islands of Exuma and Abaco, which have a combined population of fewer than 25,000 people. But as the team got closer to scaling nationwide, the project began to hit roadblocks with stakeholders.

The Central Bank’s first challenge was convincing commercial banks, credit unions, payment service providers (PSPs) and money transmission businesses to become authorized financial institutions (AFIs) within the Sand Dollar network.

“Not every institution initially joined and wanted to be an early adopter of Sand Dollar,” said Mott.

Some institutions perceived Sand Dollar as a threat to traditional banking services—a deposit alternative that might draw resources out of banks and other financial institutions. The team had to educate those stakeholders “to ensure that they recognized that what we were doing was something that should enhance the financial industry rather than undermine what it was they were trying to accomplish with their business model,” Mott said.

To get its message out, the Central Bank conducted personal outreach to financial institutions and general outreach through the media and chambers of commerce.

PSPs were among the first to bite.

“We weren’t really sure what the plan was,” said Richard Douglas, co-founder and CEO of Island Pay, a Bahamian digital payment platform that facilitates cashless payments to merchants and consumers. Initially, he said, Island Pay leaders were concerned that Sand Dollar would be transacted in a digital wallet that would compete with the company’s own services. “[The Central Bank] clarified their position—essentially, they’re minters of the currency and encouraging all licensed financial institutions to transact in Sand Dollar. So we embraced that idea and worked with them to integrate their APIs into our platform.”

That wasn’t as easy as it sounds. Island Pay had to upgrade its infrastructure to support real-time transactions, enhance security and support contingencies in case of natural disasters.

“Our merchant devices, for example, use SIM cards from both of our local mobile carriers, so if the power goes off or the internet goes down, those devices generally will stay online,” Douglas said.

By decoupling project components and breaking development into sprints, Island Pay was able to accelerate progress enough to launch its Sand Dollar services six months after the Central Bank.

Ready, Set … Not Yet

Not all AFIs were prepared for the debut of Sand Dollar. Although the Central Bank planned to launch the currency with six AFIs, only two were ready to go to market on time. Planning failures, resource shortages and technical challenges bogged down the rest as they developed their own proprietary applications for transacting with Sand Dollars. Meanwhile, the Central Bank had already begun promoting and marketing Sand Dollar to Bahamians.

“We had to really pull back on our communication,” Mott said. “Demand at the time was high, but availability was low. That was a big challenge that sort of blindsided us.”

The solution? The Central Bank took a more hands-on approach with laggard AFIs, keeping tabs on their respective development life cycles and incentivizing progress, said Mott. The Central Bank established a new benchmark of midyear 2021 to coincide with the planned adoption of Sand Dollar by the Bahamian government, which was working on its own digitization project. That initiative would see Sand Dollar as an accepted means of payment and disbursements and a replacement for traditionally cash-only transactions.

“The way we messaged it was: The government is the biggest distributor of cash in the economy and one of the largest collectors of cash in the economy,” Mott said. “If your financial institution is not a part of that ecosystem when it decides to convert, it will sacrifice market share to early adopters.”

That messaging resonated: By September 2021, five AFIs had brought their apps to market.

Scaling Up

Next, the team must scale the system across all islands by building the necessary infrastructure and continuing to educate citizens and merchants who either don’t trust or don’t understand digital currency.

To speed up the transition, Island Pay issues point-of-sale devices to merchants so they can accept digital payments and operates a network of physical kiosks where users can convert physical cash into digital currency.

Internet access is an issue on some islands. No internet means no Sand Dollar transactions for merchants or residents, Mott said. To fix that, the Central Bank is collaborating with the government to plan initiatives like free Wi-Fi on the Family Islands.

“These are things we have to recognize will be barriers to a CBDC being properly adopted in certain districts,” Mott said. “So in those districts where we find some technical challenges, we want to make sure we go in and do an assessment and, if need be, provide local assistance.”

Visitors must become part of the solution, too. The Central Bank foresees a future when Sand Dollar is fully integrated into the Bahamas’ tourism industry, including hotels, taxis, cruise ships, tour operators and attractions. Tourists want the security and convenience of credit cards, Mott said, but often can’t use them outside of large resorts. Sand Dollar will provide a way to transact with independent, locally owned business on Family Islands—providing a win-win for tourists and locals.

Sand Dollar’s impact could have a global reach as well, unlocking lessons learned for countries like China and Sweden, which are testing digital currencies, and for Silicon Valley giants like Facebook that have encountered false starts on the way to launching their own cryptocurrencies.

Sand Dollar’s success has already led to global partnerships. In February 2021, Island Pay teamed up with Mastercard to release a prepaid card that allows users to convert Sand Dollars into traditional Bahamian dollars for use wherever the card is accepted.

“Your average guy … can now go get a credit card and buy something on Amazon—which he wasn’t able to do a year ago,” Douglas said.