The Bahamas became the world’s first country to launch a central bank digital currency (CBDC) in 2020. The Sand Dollar as it is known is the digital version of the Bahamian dollar (B$). The Bahamian government introduced the CBDC to allow for greater flexibility and accessibility of people who want to participate in financial services through a mobile phone application or a card payment. The New Times’ Business Editor Julius Bizimungu spoke exclusively to the Central Bank of the Bahamas Governor, Derek Sean Rolle, on the sidelines of the just-concluded African Export Import Bank (Afreximbank) Annual Meetings in Nassau, the Bahamas. How has that experience in rolling out the Sand Dollar been? It’s been challenging because there is an incredible amount of technical work and preparation involved. I think there's still a considerable amount of work that is ahead of us. We've been able to build the platforms to provide access to the digital currency to the general population. We've been able to provide the means for new non-bank payment services providers to develop mobile wallet applications and to have a platform where those applications are interoperable. Interoperability is very important. We've also been able to inspire these companies to see the medium, longer-term potential in terms of serving some of the financial inclusion deficits in our smaller, less populated islands. We also recognise that having established a platform, the heavy lifting ahead now is dealing with issues related to adoption. There's incredible awareness locally around the digital currency, and we deliberately took that effort, starting particularly in 2023, to just let people know that there was a digital currency and how it worked. We didn't put any emphasis on telling people how to get it because we were so busy doing more of the work around improving the ease of onboarding for mobile wallets. Now we're at the stage where we can allow that access to be more easily facilitated, but we are still doing it in a gradual way. Because the most important aspect to adoption, we think, in the way forward is the merchant ecosystem. A lot of the heavy lifting is going to be how you can effortlessly allow businesses to receive payments in CBDC. That means that they can set up CBDC accounts and receive payments. But where we see the vision ending is that, at the point of sales, the fact that somebody negotiates the payment in CBDC, ultimately, will not require any effort of the merchant in terms of deciding whether they accept CBDC or not. It will just mean that the issue is resolved by the technology in the background. We are focused now on addressing the logistical issues of making the connection between mobile wallets and merchants a more seamless experience. A big part of that, we believe, will be providing the core infrastructure, some of the tools that matter for merchant services, and then also beginning to bring our commercial banks into the space so that they can provide their customers with direct access. That direct access would mean that those customers, having already an existing banking relationship, it is just an extra service that doesn't impose any customer due diligence or KYC [know your customer] type of experiences. I would say that we have a very positive outlook. ALSO READ: Time to explore free trade agreement between Africa and Caribbean – ITC’s boss Coke-Hamilton What questions did you receive in the process of introducing a CBDC? Well, the questions would have been why? Why do you want to do a CBDC? Why not do this or that? But the reason for us was that we wanted to ensure that we facilitated easier access to the payment system for new entrants. The new entrants have an interoperable platform to provide those services, so that has been achieved. We started by focusing on modernising the payment system overall and establishing legal frameworks so that non-bank entrances could come into the space. Then as you look around, you realise that interoperability, as an example, was something that everyone was scratching their heads about, how do you address it? Yes, you can you can tell the industry to solve the problem, but if you're in a very small country, this starts to look like a public good, because the costs that are involved in a country with, you know, 400,000 people, it's not going to be scalable for very small businesses, say, as in very large countries. There was a public good side of it. We realised that we could provide an infrastructure that serves those needs. So, that provided one of the very rational motivations for why you needed to have that interoperable platform. Plus, mobile wallet providers are not deposit taking institutions. They're custodians. Again, having something like a central bank digital currency means that you have a central bank library that's circulating, and therefore, you're addressing some of the issues that are involved with the composition of funds that are in mobile wallets. The interoperability was important, but also recognising that these changes reflected the fact that you wanted to have a modernised, more efficient, and accessible payment system, and you needed to accelerate that process. As you think about it, you realise that there are some central bank aspects or public aspects to infrastructure that you need to put in place. How long did it take you before you decided to launch the CBDC? I think we worked on the technical developments for close to 2 years. At the end of 2019, we were at the stage where we thought we could do the piloting – from concept to testing, and that is because mobile world technology and tokenisation existed. What’s new now is, it's a central bank liability that's tokenising and moving about. So, we were able to do that, and we really spent a lot of time thinking about how to design this digital cash. ALSO READ: Rwanda's leap into central bank digital currency How does the Bahamian Sand Dollar work in practice? The same way you go to an ATM and you withdraw bank notes and you take those bank notes and you hand them to someone else and you get value for money, basically you're getting digital bank notes from the Central Bank that exchange for liabilities that financial institutions already have, against the central bank, their reserves, or the like. That looks a lot like the cash operations of any central bank. We exchange cash in exchange for reduction in our reserves, liabilities of financial institutions, and the cash goes into circulation. That's what in the digital space people call minting and issuance. Digital minting and issuance have a similar sort of control structure and conceptual arrangement as physical cash. We have that secure aspect of it, and then the issuance is really on request in exchange for some existing claims, which you have on the central bank. There is no additional mechanism by which money is being created. CBDC only goes into circulation in exchange for some other liability or claim that already exists against the central bank. Governor, let’s say I'm visiting the Bahamas and I don't want to use cash. How do I access the Sand Dollar? As of now, you can take 5-10 minutes, download the application, answer a few basic questions, go to some authentication, and you have a ‘Level 1’ wallet. In that process, since the Central Bank does not provide frontline customer service, but it is a Central Bank app, you will identify which financial institution provides you the service. That financial institution then is responsible for monitoring you in an anti-money laundering and every other sense. Once you have completed that onboarding process, your wallet is activated, ready to use. If you have a bank account, you can then go in and you can execute an electronic transfer from your bank account to do a top-up of your wallet. Otherwise, you can go to some of the digital kiosks that the payment providers have, and you can charge your wallet by just putting in bills and coins. If you have a proprietary wallet from one of the mobile providers, a less ideal way to get CBDC is to use your credit or debit card and put some funds in your account. But we've established the ACH [automated clearing house] link to prevent the need for you to have to do that. We also have new use cases which speak to the financial inclusion side where individuals who have set up a wallet are starting to get their paychecks transferred to them and deposited in their mobile wallet. The convenience for the business is that they are able to do so using the same ACH instructions that they do for any aspect of electronic salary payments that they provide. You mentioned that I get Level 1 access when I open an account. What does that mean? Level 1 is the most basic. Looking at global standards around stored value products, the standard is for someone to be able to have access to stored value products without having to go through any KYC [know your customer] procedures, but it's very limited transaction functionality. Level 1 means that you can transact with a wallet that can hold up to 500 US dollars, and you can spend much more than that over the course of a monthly cycle. That's not the issue. But to have less restricted access, then you would have to make a direct request to the financial institution to have your wallet upgraded, and at that point, they will do the additional identification and KYC process. There too, we were able to make advances. Through this process, because they do a lot of that remotely – they use the same digital interface of the mobile devices, a person to provide their identification documents, do facial scans, etc, then they do whatever due diligence they need to do behind the scene. To achieve that, we needed to make certain that our regulatory standards were consistent with what the process should look like from an internationally robust process. ALSO READ: Rwanda mulls a digital currency in two years - Central Bank The Sand Dollar is issued through authorised financial institutions. How many of those institutions are doing that right now? Right now, we have 8 authorised financial institutions. An authorised financial institution can be a bank or it can be a money transmission service provider, or a payment provider that would establish under some of the regulations, which the Bahamas introduced in 2017. What would happen is that, even if you use the Central Bank's app during the onboarding process, those entities will be listed, then you would have to select one of them. We have, in that authorised list, one commercial bank already, but we don't have them yet in the app because we're now taking them through the process of training on how to do the administrative side of customer services to the process. That's going to be our first commercial bank to begin to provide customer services access. Then we have to give ourselves more human resources, time, and space to work and push the other commercial banks into the space. I'm placing emphasis on push because I think it's important that we increase the pressure on them. Interoperability tends to be a tricky issue, how were you able to achieve that? Until we introduced the new framework in 2017, there were no mobile payment apps in the Bahamas. So, interoperability was not an issue, but the product was not in use either. What we were able to do is provide that solution before payment apps were widely in use. Even though a lot of those third-party apps have their own tokens, and some of them were being introduced in parallel with the CBDC, in some cases their tokens coexisted. They were all able to add the CBDC tie-in to their apps, and once they're able to do that, and given the standard that we tried to get them to use, they could all send money across their platforms. As they come into the space, they have apps and platforms that interoperate with each other. What we had to do at the Central Bank was complete the final leg, which was to make certain that the digital wallets could communicate back and forth with the banking system through the automated clearing house. Once we did that, it means that, technically, Sand Dollar infrastructure is interoperable with the ACH system insofar as deposit facilities and banks are concerned. But the Sand Dollar infrastructure is instant. The ACH system is not real time. Ultimately, our goal is to make sure that the entire payment system is real time so that whether money is started or terminated in a digital wallet or deposit account, it has the same net effect in terms of settlement speed. How widespread is the use of Sand Dollar currently? It is very widespread, insofar, we think we have at least about 20% of the equivalent number of retail account holders in the banking system. To the extent that we have in the Bahamas about 120,000 mobile wallet accounts, which I don't think equate to 120,000 people. But 120,000 mobile wallet accounts compared to about 400,000 retail banking accounts is about a 20-25 per cent level of use. That's wide use, but very low average transaction value. What do the numbers look like for transaction value? For mobile wallets, I do not think it's yet 1% of total retail payment in our estimation. That is really just because the merchant ecosystem needs to be accelerated in terms of being tied in. We think that we're going to begin to see that momentum, now that it is easier for individuals to onboard. This is because the system addresses financial inclusion, especially for those who need to receive electronic payments for work but don't have easy access to bank accounts. Previously, this lack of access could have even hindered them from getting jobs. The use case where more individuals can readily receive a salary payment in a mobile wallet account, just using a deposit account, that's going to help speed up at least the number of transactions that can be done. Just so you can understand, the merchant ecosystem is not very large, but we have very few of the very large businesses as Sand Dollar merchants, say, like the grocers. So that I don’t lose touch with reality, every week I buy my groceries, I pay in Sand Dollar. Several times during the month I have to wire funds to my account to be able to pay for groceries. The lesson there is that we need to grow the experience. That's a very important standpoint for individuals who are using mobile wallets. I think that's going to help in terms of how the adoption experience evolves. Is the Bahamian CBDC serving its initially intended purpose, say, reducing the cost of handling cash or getting away with cash? I think the impact on physical cash is going to be medium to long term. Physical cash is not going to go away in my view. I think there's going to be a complementarity between physical cash and digital cash, but we have the opportunity to gradually wean the public off some of their dependents on physical cash for reasons that will be beneficial. For example, one of the advantages we see with digital payments is the ease at which we can reestablish commerce after, say, a severe hurricane or natural disaster as opposed to the alternative where you have to wait for the ATM services or the physical branch infrastructure to be repaired and reopened. We've seen that after the last serious hurricane experience in 2019. Some of our financial institutions took nearly 24 months to come fully reopened, their facilities on islands where until they were fully reopened, people were frustrated around certain aspects of services. To the extent that the mobile payment infrastructure is operable as soon as you can restore wireless communications, it illustrates an important level of resilience as well as an important target in terms of how you address financial inclusion so that everyone is tied into that platform. What is the impact of the adoption of the Sand Dollar on financial inclusion? Has it happened? We are beginning to see it. But we're also feeling the pressure which is causing us to have to accelerate. Financial inclusion impacts are going to be greatest in the less populated islands of the Bahamas. Our focus is on the education and awareness that come to that, and also beginning to appreciate that to the extent that cash is still a part of their lives, it's more difficult to get cash in those populated communities. We believe that we are going to have to leverage the Sand Dollar alongside opportunities for improvement and how we get cash into those islands, but also use the digital currency to strengthen people's access to cash. Then we can begin to see the financial inclusion impact. But again, you get very positive stories at the ground level in terms of what's happening in the islands. But the government becomes a very important piece of the equation as well in those islands because the government is one of those entities that is still forced to transact only in cash in some of those communities. To the extent that they have the resources and the time to put more effort into the project, it's going to allow them as well to be very important for us and get those communities to go digital.
