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The Bahamas strikes first with the sand dollar amid confrontation between the U.S. CBDC and China

October 26, 2020

The Bahamas, an island state in West India, made history with its digital currency on October 20 with the official launch of a new digital currency from the central bank, the so-called sand dollar, which was converted to sand dollar. It was the first country to provide a CBDC to all residents, and that is The Bahamas is a small nation – with only 393,000 people – seems to be an event of global financial importance.

Or not? “”Might be if successful“Ross Buckley, professor of disruptive innovation at the University of New South Wales in Sydney, told Cointelegraph.”Other small island states – like in my backyard in the Pacific – are watching this closely and could follow suit.“”

James Barth, professor of finance at Auburn University, put the event in the context of a series of CBDC milestones starting with the launch of Bitcoin (BTC) in 2009 and including the announcement of Libra on Facebook in 2019 testing with CBDC in China in April and the declaration of the European Central Bank on the possible issue of a digital euro in October. “”These events, and the COVID-19 pandemic, made it virtually safe for one country – most likely a small country – to go live with a central bank digital currency.“, He said.

The Bahamas strikes first with the sand dollar amid confrontation between the U.S. CBDC and China
The Bahamas strikes first with the sand dollar amid confrontation between the U.S. CBDC and China

However, some said it was too early to say. Hans Gersbach, economics professor at the ETH Zurich in Switzerland, told Cointelegraph: “First we have to see if it works well in practice.“Jay Joe, CEO of Nzia Limited, the technology solutions provider for the use of the sand dollar in the Bahamas, told Cointelegraph that the sand dollar was introduced in the Bahamas to facilitate financial inclusion across the country:

“The Bahamas, as a vast archipelago stretching over 100,000 square miles of ocean, has many remote islands and communities where residents do not have access to formal financial services.”

Due to the lack of population, it is often not economical for banks to set up branches and maintain the infrastructure. The new CBDC “gives the Bahamian population universal access to digital payments and extends the reach of financial services to all corners of the country“Joe said to Cointelegraph. On the top questions the country’s central bank and others wanted the startup to answer, Joe said:”how existing regulations and guidelines are shaped and how CBDC will ultimately be adopted by people so that one day it will be as ubiquitous as cash“.

A sense of urgency?

Global demand for online services has accelerated dramatically with the COVID-19 pandemic, and this can be seen as a driving force behind the development of CBDCs around the world. As the Central Bank of Canada Deputy Governor Timothy Lane said recently. “”If we are to be ready to develop a digital central bank product, we must move faster than we thought necessary.Barth continued:

“The virus has changed its behavior in favor of greater social distancing and thus greater use of online communication and transactions at the national and global levels. This certainly makes digital currencies more relevant than money and for payments.”

However, this sense of urgency is not universal, as Jerome Powell, chairman of the US Federal Reserve, said at an International Monetary Fund event on October 19. He believes that CBDCs face many critical challenges such as preventing fraud and cyberattacks, ensuring financial stability, and protecting privacy.Its a lot to do. […] In fact, I think CBDC is one of those issues where getting it right is more important for the United States than being the first.“.

The United States doesn’t have to worry about losing its first mover advantage on digital currencies, Powell implied. I was right “”Probably in the immediate sense, yes“According to Buckley, who added:”In the long run, however, the US will have to act quickly if China or any other nation allows its CBDC to be used in international trade“.

The United States is making extraordinary profits from the minting of the world reserve currency, and loss of exclusivity in this regard could cost the American economy dearly. This would have political ramifications as well, such as putting many countries outside the reach of US financial sanctions. Buckley believes China’s “long game” is undoubtedly to overturn the US dollar from its position as the world’s reserve currency. “China hates that the world economic system is built on the US dollar and aims to build a parallel system that it controls,” he said, adding: “This was the impetus for the naming of trade agreements between exporters and importers from other countries with China in renminbi. “

It was also a motivation for the New Development Bank set up by the BRICS countries – Brazil, Russia, India, China and South Africa – and also for the Infrastructure Investment Bank, Buckley continued, referring to another multilateral development bank, the creation of China was suggested. in 2009 to make better use of China’s foreign exchange reserves in a global financial crisis. “A CBDC [china] It will interact very well with dematerialized digital trade documentation. So if China allows DC / EP to move, it will be a total game changer. In time, I think they will. “

For his part, Barth agreed that the US didn’t have to rush to bring a CBDC to market since the US is the largest economy in the world and accounts for 20% of global gross domestic product. and the US dollar remains the dominant currency in the world. “”President Powell is right that the US need not worry about losing the “trailblazer” advantage by rushing to issue a central bank digital currency.“”

On the flip side, Sidharth Sogani, founder and CEO of analytics firm Crebaco Global, told Cointelegraph that it was important to be first to market in major economies. “”China is already testing its CBDC. They have integrated POS, mobile applications, and many other source codes to develop applications in their CBDC“.

He also said: “The advantage of being the first to get to market is crucial in this case, especially when competing with China.” The United States continues to dominate financially, but it lags behind when it comes to CBDC technology – “And this is where China is sure to lead the way as it is done with its CBDC and is the second largest economy in the world.“.

Sogani explained this from a bank client’s perspective: “If you have a lot of experience with Bank A, use a Chinese CBDC.”Are you going to open an account or download an application at Bank B – doing business with a US dollar CBDC?“When China launches its CBDC, it will attract a large number of global customers very quickly.”It will be difficult to catch them“.

The USA should have a CBDC ready – just in case – suggested Gersbach. “Preparation needs to be stepped up to be quick to follow when successful CBCD models are introduced.” However, according to Barth, the big question is how “CBDC will affect money and payments, particularly the role of government”. Gersbach also outlined several other factors: “Prevent cyber attacks, privacy concerns, and financial stability. Security of all kinds and financial stability are the two most important problems to be solved“.

Sogani assumed that CBDCs would be based on a blockchain platform and asked how CBDCs would relate to Bitcoin and other cryptocurrencies. “”Is [una CBDC] a completely different thing, with different bases and uses. Understanding the essentials is the greatest challenge“.

How close is the first CBDC to mass use?

It seems that the worldwide development of CBDC has accelerated in 2020 and if it does, when could the first CBDC be seen for mass use? According to Barth: “Most of the major countries have been studying CBDCs for some time“He added:

“China has been involved in legal proceedings, of course, but had no information on a national adoption date. However, it is likely the first major country to issue a CBDC, and if so, it will likely cause others.” large countries follow suit. “

Regarding China, Sogani said: “The legal framework seems to be being worked out. It will be released to the masses in a few months. I don’t see any other country so close to China’s stage of developmentAccording to Buckley, “China clearly intends its digital currency / electronic payments project to dominate domestic payments and money within China, and they have been working on it for five to seven years.”

As long as the project remains domestic, there is no real challenge to the United States. But if China takes it globally, “It will take years of work for the United States to respond with its own CBDC, known as the digital dollar“Said Buckley.

Meanwhile, Sogani sees great benefits, even for small countries – like the Bahamas – that are taking the digital path. “”A CBDC enables a country’s currency to go global, which the current financial ecosystem does not.“To make an international transfer, you have to sign extensive documents and pay the fees.”Thats expensive. It takes up to two days and is complicatedSogani commented, adding:

“However, if it’s a CBDC it can be routed straight to the mobile apps and tracked. Yes there will be compliance but the SWIFT method which includes Nostro and Vostro accounts will be removed which is life makes it easier. “

Joe called the start of the Bahamas “The world’s first live implementation of a production-quality retail CBDC“When asked if there are classes here for other nations, the NZIA CEO told Cointelegraph that there are many.”including the importance of grassroots involvement and understanding of the CBDC and its implications for the financial intermediary“and adds:

“A CBDC is more than just sophisticated software and systems for mobile wallets. It needs to be developed from scratch and built as part of a national payment infrastructure that meets the needs of the common people.”

In short, recent events seem to have some global logic. Given that the US dollar, the established global reserve currency, has a lot to lose if it hits the market with a faulty CBDC, it seems to be acting cautiously and be content with letting smaller players like the Bahamas give theirs Do thing. Beta test. Meanwhile, China, the challenger, is moving fast, but its DC / EP project is focused on the country’s mass market for now. A truly global digital yuan may be years away.

“A CBDC is a total game changer that poses a number of difficult questions,” concluded Buckley. “That’s why no country has done it yet. Central banks never like to step into the unknown, it’s not in their DNA for good reason. But I think China will force the hands of other nations.”