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

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. The author then develops 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 commercial banking sector. This paper argues 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. The anonymity of CBDCs is identified 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. This paper concludes by suggesting that combating cryptocurrencies is a task that cannot be solved by a CBDC.