Two years after the world’s first central bank digital currency (CBDC) went live in the Bahamas, the company behind the technology used for the digital fiat argues important learnings from this test case can help policymakers in other jurisdictions with their own deployment.
The Sand Dollar launched in 2020 with the aim of increasing financial inclusion, improving payment system resiliency, increasing the digitalisation of micro and small businesses (MSMEs) and reducing the illicit use of money.
Despite the strong ambitions of the world’s first retail CBDC, the adoption of the digital currency has been slower than expected.
As of July 2022, just 7.9 percent of the population had used the CBDC, according to the central bank. Adoption was in part affected by the coronavirus pandemic, which halted much of the central bank’s efforts to launch in-person promotions or marketing campaigns for the Sand Dollar.
“We should have paid more attention to adoption,” Vinay Mohan, co-founder of Movmint, the technology provider behind the Sand Dollar, told VIXIO on Friday (October 14) at the sidelines of the DC Fintech Week conference in Washington, DC.
Speaking at the DC Summit Digital Lecture Series, Mohan stressed when the Bahamas first started the project there was no literature on how a CBDC should be implemented.
“There was no playbook. There was no precedence for whether we do account-based or token-based, whether we choose blockchain or non-blockchain, none of these things existed,” Mohan noted.
The various important lessons learned during the first two years of the Sand Dollar experiment “speaks to the strength of the central bank of Bahamas”, according to the tech expert.
“When we look back we always say we got it right because we had a very strong partner in the Central Bank of Bahamas.”
According to Mohan, the first lesson to build a good CBDC foundation is that “policy should guide the rest of the playbook. It cannot be a technology-first implementation”, meaning that the specifications must come from the regulators and cannot be led by technological solutions.
“The second lesson learned, and it cannot be emphasised enough, we need grassroots partners at the table from day one.” Discussions about a future CBDC must involve technology partners, banks, authorised financial institutions that will have access to the network, but also academia, data scientists, users and small fintechs.
“Half of the people [in the Bahamas] are digitally illiterate,” Mohan noted.
“How are you going to make people use private keys if they cannot read them? You need partners at the table who help you. This cannot be done by regulators and technologists alone.”
He also warned against thinking about the CBDC as a sterile system separated from other parts of the payment system. CBDC must be an integral part of the holistic national payment system, Mohan stressed.
“Money is money … . The end user should ideally not see the difference [between a CBDC or an e-money wallet]”.
The Sand Dollar, for instance, is fully interoperable with other forms of digital monies in the Bahamas, meaning that the CBDC is transformed automatically to e-money if the recipient does not have a CBDC wallet.
Additionally, policymakers should consider the CBDC not only as a clearing and settlement system but also as a platform where private companies can build overlay services.
For instance, Mohan noted that one fintech company is working on enabling the Sand Dollar on public transport. Developers hope that if travellers get used to paying their bus tickets with the Sand Dollar, it could eventually expand to other use cases.
A similar exercise facilitated the uptake of contactless payments in the UK, which was initially boosted by Londoners swiping their cards across Transport for London’s integrated transit system. Many argue that this specific daily use case was crucial in forming the habit for using contactless cards.
The platform can also provide opportunities for businesses to build digital identity services or overlay services for credit and loan extension, Mohan explained.
Further, “if CBDC has to be widely adopted it has to be lovable”, Mohan said, adding that if policymakers want to shift consumers’ payment habits, there must be design elements that make people choose the CBDC over other forms of digital payments.
“We put that done to something we can’t yet frame properly so we call it lovability,” Mohan said.
“If the CBDC does not have that stickiness, it’s not trending, it’s not something that forces me to pick up my phone and look at it for at least once a day, adoption will probably not be going anywhere.”
Last but not least, the tech expert stressed innovation alone is not sufficient to make people change their payment habits, it must be supported by “intervention”.
When the central bank designed the Sand Dollar, it placed much of the focus on creating incentives for consumers, Mohan said. But it is important that all participants in the payment ecosystem have an incentive to embrace the new form of payment.
Mohan told VIXIO that acceptance is not mandated in the Bahamas but is strongly encouraged by policymakers. For instance, accepting the Sand Dollar costs much less for the merchant than accepting payment cards, which typically cost the merchant 2.5 percent of the transaction value.
“People tend to think about the Sand Dollar as a flash in the pan idea,” Mohan suggested. But in fact, he stressed, the CBDC was the result of 20 years of investment and research made as part of the Bahamian Payments System Modernisation Initiative (PSMI).