Human knowledge proceeds in fits and starts. Although the velocity of change has accelerated over the years, certain intractable problems stand out for their resistance to thought and deed. Of this group, there are problems that are hard, which are not purely engineering problems, such as quantum computing or deriving usable energy from small-scale fusion reactors. There is another group, which through its scale, in space and time also involves another sort of complexity, human behavior mediated through politics and social phenomenon; the climate challenge facing humanity can be said to be in this category. Luckily, CBDCs (Central Bank Digital Currencies) fall into the tractable category of this group. There are no major engineering challenges to be faced, the basic science was solved many years ago, however the risk associated with failure has to be balanced with the benefits. There is also a behavioral element and a scaling problem, mainly to do with network effects, both for and against.

The first nationwide CBDC was released into production in the Bahamas more than a year ago. The evocative name of the currency is Sand Dollar. Sand Dollar is also the name of a creature in the genus Clypeasteroida. The tests (skeletons) of these creatures, which survives them after death, appear on beaches. Bleached white, rounded, symmetric, etched with a pentagram they remind people of Spanish silver dollars washed up on the shores, from the numerous shipwrecks that dot the Caribbean. Hence the name Sand Dollar. Unlike these, the Bahamanian CBDC called the Sand Dollar is a purely digital construct, representing a coin of the realm. There are numerous reasons why the Bahamas chose to release a digital fiat coin. The small population scale and the far flung nature of the island nation is one of the reasons, coupled with this is the culture of the islands and their leadership, which tends to be adventurous and risk taking. They have relatively less to lose and much to gain through such a move.

A diverse group of people inhabit the Caribbean, many of them emigrants from colder climes. Many of them are not just snow-birds, similar to the skuas, jaegers and puffins, but live there year-around. One such person is Richard Douglas, CEO and co-founder of Island Pay. Douglas was born and educated in Canada, but has been in Bahamas for a couple of decades or more. Being the CTO and co-founder of Secure Hosting for many years, he is a data security and privacy protection expert. As we shall see, a unique combination of local experience, aptitude, relationships, training, experience with an existing product and other factors make Island Pay the kind of partner to a Central Bank to operationalize a revolutionary concept like a CBDC.

Island Pay was well placed to participate in the rollout of the first CBDC in production as the first to receive a license as a Payment Service Provider and Electronic Money Institution by the Central Bank of The Bahamas, and is supporting large scale payments distributions for the Government of Bahamas. This puts Island Pay in the center of financial inclusion, servicing the unbanked and the underbanked. I spoke to Richard Douglas about Island Pay’s retrospective on the Sand Dollar, a year into production, we had a wide-ranging conversation as is usual with my methods, Richard Douglas was most willing to have such a dialog.

We started off by talking about the challenges. Having operated a hosting service focused on security and privacy, Douglas was very aware of the needs of a data center. It had been challenging to run with a meaningful business continuity plan with proper 2-Factor authentication and other security practices due to lax attitudes. I was also aware of such box ticking compliance in investment banks in the US. However, a CBDC licensing regime had to have the security process written out properly and there is regulatory clarity around. Island Pay had cybersecurity audits performed by external agencies. As a result, there is improved security consciousness among all the participants, operators of data centers, other PSPs and so on.

People are used to cash, 60% of the people in the Bahamas still operate using cash. Even though the Island Pay wallet is ubiquitous, the number of transactions using Sand Dollar approach only 50% of the wallet holders, out of 23K transactions/month, only about 10K use Sand Dollar. These numbers are minuscule compared to transaction volumes in other countries, we do have to remember that the total population of the Bahamas is around 400K, not even as much as one-seventh of the population of Brooklyn (also known as Kings County), a borough of New York City.

Wallet interoperability was a requirement from the Central Bank of Bahamas that Richard Douglas was not happy about. If wallets were interoperable, Island Pay could hemorrhage customers rapidly to others, he thought, a sort of a vampire vulnerability built into the wallet. However, to Island Pay’s pleasant surprise they gained customers, mostly because their wallet was much better. Building moat around your business, rather than forcing to open it up, allows companies to compete on features and ease of use.

Among use cases that surprised Douglas was the the one that he cited as an unexpected effect that also benefited the early adopters like Atlantis resorts. Atlantis resorts relied on well heeled foreigners, however Bahamians visited the Atlantis for day use, to use its facilities, to dine at its restaurants and so on. The payments have to be made in cash for the parking facilities. After the adoption of Island Pay Sand Dollar wallets, customers could make these payments effortlessly, and a merchant like Atlantis accepted them. Atlantis found that their Bahamian guests liked the convenience and their frequency and number of visits grew rapidly. Seeing the benefits of the Sand Dollar, Atlantis is now planning to pay salaries using the Sand Dollar. In the middle of the pandemic, this increased revenue and use helped the merchant tremendously. Another use case was that the incidence of employee theft in Pizza shops dropped from 4% to 1.5% due to increased use of the cards.

By law, customers who used Sand Dollars could not be charged a transaction fee, merchants also saw their transaction fees go down from 3% to 4.5%. In addition, due to immediate settlement, Sand Dollars were credited to the merchant wallet almost instantaneously, improving their cash flow and liquidity position. Another win for merchants.

Even though adoption was not as rapid as they hoped, the Sand dollar project is a success for Island Pay. Added to this is a slew of inquiries from around the world for their expertise as one of the only companies that have participated in a CBDC rollout, especially from the wallet end. Although Richard Douglas was reluctant to talk about identity of his prospects, it seemed like they are Central Banks from much larger economies. The beauty of working on a wallet in the small is that many kinks in the design and usability can be worked out in a production environment while preparing to launch a wallet into many larger ecosystems.

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