Retail Central Bank Digital Currencies (CBDC), Disintermediation and Financial Privacy: The Case of the Bahamian Sand Dollar

TL;DR

This paper analyzes the design and implications of the Bahamian Sand Dollar CBDC, highlighting risks to commercial banks, disintermediation, and privacy concerns, and suggests regulatory measures to mitigate these issues.

Contribution

It provides the first real-world case study of a retail CBDC, contrasting its design with theoretical specifications and analyzing its systemic risks and regulatory challenges.

Findings

CBDC design can lead to bank disintermediation and solvency risks.

Restrictions and caps are necessary to prevent banking sector disintermediation.

Anonymity features of CBDCs may hinder adoption.

Abstract

The fast-growing, market-driven demand for cryptocurrencies worries central banks, as their monetary policy could be completely undermined. Central bank digital currencies (CBDCs) could offer a solution, yet our understanding of their design and consequences is in its infancy. This non-technical paper examines how The Bahamas has designed the Sand Dollar, the first real-world instance of a retail CBDC. It contrasts the Sand Dollar with definition-based specifications. I then develop a scenario analysis to illustrate commercial bank risks. In this process, the central bank becomes a deposit monopolist, leading to high funding risks, disintermediation risks, and solvency risks for the com-mercial banking sector. I argue that restrictions and caps will be the new specifications of a regulatory framework for CBDCs if disintermediation in the banking sector is to be prevented. I identify the anonymity of CBDCs as a comparative disadvantage that will affect their adoption. These findings provide insight into governance problems facing central banks, and coherently lead to the design of the Sand Dollar. I conclude by suggesting that combating cryptocurrencies is a task that cannot be solved by a CBDC.