Bahamas leads countries around the world in Central Bank-issued cryptocurrencies, with its Sand Dollar CBDCs have many advantages regarding payment efficiency, speed and friction reduction However, some very real privacy concerns and questions around power of the government also arise
The topic of Central Bank Digital Currencies (CBDCs) is one that is just beginning to enter mainstream consciousness. While many crypto enthusiasts hope that more countries will follow El Salvador’s lead and adopt Bitcoin as legal tender, stablecoins apparently present themselves as a less ambitious case for sovereign adoption as they are immune to the volatility that plagues Bitcoin. Simply digital iterations of their fiat alternatives, the exchange rate is indexed from one to one and its value does not fluctuate. But while there are small examples, like the city of Lugano, Switzerland, where decentralized stablecoins like Tether (USDT) can be used as legal tender, there are also many governments working on their own, centralized stablecoins.
According to PwC, none are more advanced than the Bahamas, where the Central Bank issued a digital version of the Bahamas Dollar in October 2020. Colloquially known as the Sand Dollar, it has exactly the same utility, legal status, and authorization as the conventional fiduciary alternative. The advantages are many. Speed, efficiency and security of payments are key, with an overall reduction in friction thanks to blockchain. The Bahamas also hopes to leverage the publicity of the initiative, helping to place the country as the cryptocurrency hub of the Caribbean. The traceable nature of the blockchain will also help to curb money laundering, counterfeiting, fraud and all types of financial crimes. Additionally, the announcement cited the benefits that can be reaped in the lending market, with the CBDC able to “provide an excellent record of income and expenditure, which can be used as supporting data for microcredit applications.”
However, not all consequences of CBDCs are positive. There are very real privacy concerns here, with the government theoretically able to track exactly what you spend, when you spend it, and who you spend it with. Accounts can also be frozen at will – think of Tether that has frozen certain USDTs in the past after hacks. This raises all sorts of questions about a possible dystopian scenario, in which increasingly science-fiction notions such as social credit scores being automatically leveraged in payment activity could be implemented by governments. Let’s say the government knows that you spent $10 last night to bet on football, and that was automatically reflected in your credit score – or worse, your social score. It’s easy to let your mind wander to the power this would give more authoritarian governments. Is absolute sovereign control over citizens’ finances a good thing? They already control the monetary environment regarding printing, inflation and interest rates, which is why many turn to Bitcoin. With CBDCs, they can implement sanctions at will, have full visibility over their net worth, tax liabilities, consumption habits and many other facets of their life, considering the importance of money for transactions in today’s world.
For the moment, thankfully, these notions remain confined to the plots of Black Mirror. However, CBDCs approximate the potential of these scenarios and open up the possibility of unfathomable power for a sovereign state. Absolute centralization within cryptocurrency is a dangerous game given the traceable nature of the blockchain and the digital wallet infrastructure attached to it. The Bahamas, so far, are leading the charge. For this case specifically, all systems point to this being just a step towards efficiency and an innovative tool to help build a broader crypto ecosystem for the Caribbean nation. Still, with other governments – like China – working on iterations of their own CBDCs, it’s worth worrying about the potential power these CBDCs can grant if leveraged in certain ways. This rings especially true for more authoritarian governments.