The Bahamian government will soon compel commercial banks to distribute its central bank digital currency (CBDC), known locally as the Sand Dollar. Despite accounting for less than 0.41 percent of the currency in circulation, the Sand Dollar’s usage has declined over time, according to the Central Bank of The Bahamas. While a private business might prepare to close under similar circumstances, the central bank has different plans.
In an interview with Central Bank of the Bahamas Governor John Rolle, Reuters reporters Elizabeth Howcroft and Marc Jones described Rolle’s position, stating, “With [CBDC] take-up still limited, carrot was turning into stick and commercial banks were now being told of regulations that will effectively force them to distribute [the CBDC].”
In other words, the central bank introduced a CBDC, but it failed to attract interest. Initially, the central bank tried to encourage adoption by offering rebates for topping up CBDC wallets and spending the digital currency in stores. However, this incentive was insufficient for widespread acceptance. Consequently, the government is abandoning these incentives and implementing regulatory measures to mandate banks to distribute the Sand Dollar.
We’ve seen this type of behavior before. In Nigeria, the central bank faced similarly low CBDC adoption rates of just 0.5 percent. Initially, to encourage adoption, the central bank offered discounts on cab fares. When that strategy failed, the central bank announced that cash would be pulled from circulation to issue new notes. Any old notes that were not exchanged would expire within two months.
The scheme resulted in a cash shortage that led to protests and riots in the streets. However, the Central Bank of Nigeria ultimately celebrated a rise in CBDC adoption from 0.5 to 6 percent, as people had no other options.
Although the Central Bank of The Bahamas is taking a less drastic approach than its Nigerian counterpart, the situation highlights a fundamental difference between public and private sector endeavors.
In the private sector, an entrepreneur might open a shop only to discover that their services are not suited to the market. For example, a snowboarding shop is unlikely to thrive in The Bahamas. With no customers, the shop would either close down or pivot to a new business model. This pivot would require convincing investors to fund the new venture, and failure to make a compelling case would mean the end of the business.
The public sector operates differently. Government projects are not easily shut down. Unlike in the private sector, no one volunteers funds to support government initiatives. Instead of being driven by a profit model that allocates resources where they are most valued, these projects reflect the priorities of government officials.
Additionally, the government has the unique ability to resort to force. The Nigerian government forced cash off the streets, and now the Bahamian government plans to compel banks to distribute the CBDC. No business wields such power.
No business is forcing people to use Bitcoin, Ether, or any other cryptocurrency. Even Ripple, which collaborates with several central banks to develop CBDCs, cannot force people to use its cryptocurrency, XRP. Despite CBDCs being relatively new, there are already two examples of governments resorting to coercion to promote their use.
Central bankers and government officials should remember that if something has to be forced, it is probably not a good idea in the first place. CBDCs are no exception to this rule.