Franklin Noll of the Federal Reserve Bank of Kansas City has written a payment systems research briefing note on what can be learnt from the experience of retail CBDCs (rCBDC) in the Caribbean. The Bahamian Sand Dollar was first issued in 2020, the DCash from the Eastern Caribbean Currency Union (ECCU) in 2021, and the Jamaican JAM-DEX in 2022.
Adoption levels have disappointed for both consumers and merchants and this paper draws three conclusions:
Although each rCBDC was pursued for multiple reasons, the main, shared, goal was to transform largely cash-based economies into digital economies.
Expanding financial inclusion may have been a supplementary goal or benefit but does not appear to have been the priority.
The Central Bank of the Bahamas (CBB) began considering a CBDC to give all Bahamians access to digital payments and banking services and reduce the size of the informal (cash-based) economy. Eastern Caribbean Central Bank (ECCB) Governor Timothy Antoine suggested the ECCB was pursuing an rCBDC ‘to help reduce cash usage within the ECCU by 50% [over five years], promote greater financial sector stability, and expedite the growth and development of our member countries.’
The Bank of Jamaica (BOJ) wanted to reform retail payments and transition to a digital economy. Specifically, the BOJ wanted consumers and businesses to be part of a ‘modern payment system, of a digital alternative to cash,’ that would result ‘in systemic efficiency and significant reductions in costs for cash distribution and storage’ for the BOJ and the financial system.
Each of the three rCBDCs was built on a different technological foundation, contracting with technology firms to build the platform instead of developing them in-house. All followed a vision for an intermediated, wallet-based rCBDC.
In an intermediated CBDC model, the central bank performs all minting, burning, and settlement, and the authorised financial institutions that provide end users retail financial services are responsible for all contact and interaction with end users. A wallet-based CBDC means that transactions occur via smartphone-based apps or digital wallets. In some cases, the wallets were created by the CBDC developer. In all cases, detailed transaction data are only available to the financial institutions providing retail services.
The Sand Dollar wallet has an offline component that allows transactions (limited by total value) when connectivity with the CBDC ledger is lost.
DCash digital wallets have no dedicated offline capability.
Unlike the other two rCBDCs, the Jamaican CBDC is not built on a blockchain or a distributed ledger. Instead, a centralised ledger controlled by the BOJ handles ‘digital bearer instrument’ tokens that move through Jamaica’s RTGS system.
The Sand Dollar went nationwide 20 October 2020. Despite a series of Sand Dollar educational campaigns, promotions, and giveaways - as well as the integration of the rCBDC with government payments and the ACH system, the value in circulation reached B$1,099,910 by September 2023, only 0.19% of the total currency in circulation at the time.
The DCash pilot started in 2021. By March 2023, 400 merchants were participating. The ECCB has run educational campaigns and in-person demonstrations but its initial issuance of EC$2 million grew to EC$2.45 million in March 2023, accounting for only 0.16% of the total currency in circulation at the time.
JAM-DEX launched on 11 July 2022. By the end of that month around 120,000 individuals and 2,300 merchants were reportedly on the JAM-DEX network via the Lynk platform. The first 100,000 customers to sign up for the rCBDC received an incentive bonus of JMD$2,500, resulting in circulation increasing by JMD$250 million. Circulation then stalled and the BOJ ran cash promotions, merchant outreach, and an education campaign to encourage adoption. By February 2023 185,410 individuals, 90 small merchants, and 4,500 micro merchants were participating in JAM-DEX. Despite that, currently JAM-DEX circulation is around JMD$257 million, roughly 0.11% of the total currency in circulation.
While these rCBDCs use different foundational technologies, they share similar designs and privacy protections, but all have disappointing adoption levels.
The CBB saw four factors leading to very low adoption of the Sand Dollar:
The ECCB, and its technology supplier Bitt, say the slow adoption was due to failures in user education, the selling of use cases, and low merchant participation. The ECCB didn’t develop the merchant network, focusing on DCash development rather than on its implementation and use. DCash was not integrated with merchant POS devices or with ECCU legacy financial systems, contributing to low adoption among merchants.
For the BOJ, the main reasons for low JAM-DEX adoption were a lack of public education and difficulty in onboarding merchants. The launch was met with apathy by merchants and consumers, causing the BOJ to respond with ‘a national sensitization and education campaign’ to promote the importance of using the rCBDC among consumers. Merchants wanting to accept JAM-DEX needed updated POS devices, and the BOJ did not incentivise or mandate commercial banks to modify their ATMs to accept and convert JAM-DEX. Incentives or mandates may have helped given that commercial banks had little interest in promoting the rCBDC.
Three observations from the Caribbean rCBDCs
1. Underlying technology may have little effect on the adoption of rCBDCs.
The low adoption rates occurred across all three issuers irrespective of their different technology and wallet developers.
2. To adopt an rCBDC, consumers may need to be convinced of demonstrable added value.
While the issuing central banks explain consumer disinterest as a lack of digital experience, a ‘natural disinclination’ or a general apathy, their responses, largely education campaigns and incentives, have had little effect on circulation numbers.
Perhaps the real challenge is a lack of added value for the potential users.
3. An rCBDC may need to be part of the entire payments ecosystem.
An rCBDC is not about technology but about function. It does not stand-alone but has to work as a system and with the legacy financial and payments systems. It needs buy-in from all the mutually dependent stakeholders: consumers, merchants, and commercial banks.
Wallets need to be integrated with bank accounts to allow effortless transfer of funds between bank accounts and rCBDC wallets. Merchants need an rCBDC to interact with their existing POS devices, inventory systems, or bank accounts.
If they don’t, they are costly, complex and burdensome.
In an intermediated system, the financial institutions handle the front end with consumers and merchants, including updating ATMs, integrating POS devices, and even developing rCBDC wallets. This integration is complex and expensive, but the banks received little promise of increased business or remuneration.
The lessons laid out in this article will apply to any rCBDC anywhere. The need for an rCBDC to add value for consumers and merchants if it is to be widely adopted is the key. China seems to understand this, as shown by reports almost every week of initiatives to make its e-yuan more accessible and useful.
While the underlying rCBDC technology is important, for widespread adoption consumers may need the rCBDC to add value relative to cash, and for an rCBDC that is widely accepted, readily accessed, and easily used.
