In the summer of 2019, the Central Bank of The Bahamas announced the launch of ‘Project Sand Dollar’, an attempt to build a digital version of the Bahamian dollar with retail and wholesale applications. The project was aimed at improving financial inclusion and accessibility across more than 700 islands and cays with infrastructure challenges, unstable communication and power, and a year-round risk of natural disasters.
NZIA Limited was selected as the sand dollar technology implementation partner to design and develop a digital version of the Bahamian dollar. A hybrid technology solution was combined with legal, risk and policy expertise from a partnership with law firm Norton Rose Fulbright. This culminated in the launch of arguably the most comprehensive and innovative CBDC solution available today.
A proprietary software stack, Cortex, serves as the central command and control application for Project Sand Dollar. The Cortex logical architecture provides a start-to-finish capability for managing all aspects of central bank digital currency issuance, movement, usage, risk management, compliance, ecosystem engagement and end-user accessibility.
The sand dollar could enable the Bahamas to transition to a hyper-connected, post-modern economy. Because it is legal tender, it promises a host of benefits, including CBDC-based settlement of securities and digital assets, as well as at-source deduction of national and local taxes, fees and levies. It provides the foundations for a national identity scheme and shared know-your-customer information. The sand dollar could be used for retail e-commerce and wholesale trade credit settlement. ‘Programmable money’ presents the ability to apply constraints on how funds are used to meet specific use cases, for example issuing emergency funds and aid assistance directly to the wallets of those in need.
As one of the few live retail CBDC projects, the sand dollar is a great source of data and learnings for the project’s stakeholders. While several details cannot yet be shared publicly, the following are valuable lessons that have resonated with the development team.
First, grassroots engagement is vital. At the core of the sand dollar technology team’s vision for CBDC is the belief that the intermediated financial system, while not without its issues, remains crucial in advancing the economic welfare of societies everywhere. Thus, it is imperative to address the concerns of legacy financial institutions and grassroots participants regarding the disintermediation that can happen with certain models for CBDC adoption.
Authorised financial institutions, such as commercial banks, money transfer businesses and payment service providers, will engage with consumer groups and grow the sand dollar network. This will allow the central bank to balance the benefits of innovation with the risk of losing financial intermediation and essential credit networks built over long periods of time.
To facilitate this approach, the team has focused on creating an open, front-end CBDC solution that can foster the growth of a new ecosystem and preserve the role and mandate of the AFIs. It has also developed a rich library of application programming interfaces and software development kits so that financial institutions and other digital money players can build on top of the CBDC substrate. In this way, financial intermediaries can introduce their own innovative, CBDC-based financial products and services to better meet the demands of the changing marketplace.
Second, technology must operate within an effective legal, regulatory and policy framework. If CBDC is to be widely adopted and useful to society, it must be something more than an interesting sandboxed experiment. It is easy to proclaim that private sector and government stakeholders will all be engaged in a CBDC roll-out, but the considerations that go into calibrating the respective interests are complex and fraught with unknowns. There is no database of full-scale CBDC deployments that could serve as a benchmark. This is why NZIA devoted substantial efforts to building a diversified team of legal experts, economists, policy specialists and technologists. Central banking authorities around the world are conducting sandbox experiments. While these can be useful, they are no substitute for real world deployment.
Third, financial services infrastructure requires physical infrastructure. Project Sand Dollar needed a design that could be effective, resilient and useful in the face of infrastructure and natural world barriers, such as rolling blackouts or load-shedding, intermittent network failure, hurricanes and the natural difficulties created by the dispersal of the population across many islands and cays. The lack of infrastructure robust enough to handle a system as complex as retail CBDC is a daunting challenge with no easy solution. For the sand dollar, the developers had to engineer low cost, redundant networks, termed ‘CBDC wifi’, to support the backbone of the existing network connections servicing the country.
As a technology company and an innovator operating in a cutting-edge space of the market, NZIA is acutely aware of the truth of the oft-quoted business aphorism – no business plan survives its first contact with customers. The development of the sand dollar saw several on-the-fly innovations at a time when the broader CBDC narrative was evolving and lacked a central frame of reference.
Building a viable solution in uncharted waters meant taking into consideration the interests of the Bahamian public and creating a bold, people-first design supported by pioneering technology.
In less than a year, the sand dollar has gone on to become one of the first implementations of a production-grade, token-based retail CBDC with circulation across financial institutions, businesses and consumers. And despite the global health crisis, the Bahamas is set to carry out a nation-wide rollout of its CBDC infrastructure by October, a testament to the timeliness and value of this ground-breaking innovation.
John Kim is Partner and co-Head of Fintech, Canada at Norton Rose Fulbright. Vinay Mohan is Chief Operating Officer of NZIA Limited. This article originally appeared in the September edition of the Digital Monetary Institute Journal.