IMF Paper Points To Sand Dollar Risks

• Pointing to potential risks of the Sand Dollar, the International Monetary Fund (IMF) said in a new working paper that the central bank digital currency (CBDC) could pose risks to financial intermediation, integrity, and cybersecurity despite its limited use to date.
• The working paper, entitled “Crypto Assets and CBDCs in Latin America and the Caribbean: Opportunities and Risks”, notes that while the Central Bank of The Bahamas’ (CBOB) architecture has some features to mitigate risks, there are still challenges.
• “The CBDC could substitute for deposits in commercial banks, with implications for bank funding, profitability, and financial intermediation. Moreover, a digital currency involves costly investments in new technologies, infrastructure, and external expertise. It can also expose a central bank to new risks and introduce new challenges for ensuring financial integrity, while cyberattacks or technological glitches can impact the central bank’s reputation,” the paper states.
• However, depending on the deposit structure, banks could be subject to disintermediation, bank runs, and deposits could quickly move from a financial institutions to the CBDC and as such, mitigation strategies are warranted. “To limit disintermediation risks and substitutability with bank deposits, Sand Dollar holdings do not earn interest, and a ceiling is in place limiting the amount users can hold in their wallets. Moreover, level 2 and 3 wallets are linked to accounts at financial institutions. To mitigate potential runs in case of stress, a circuit breaker has been embedded in the system to prevent massive flows,” the IMF paper stated.
• The Bahamas was the first country in the world to launch a CBDC, the Sand Dollar, in October 2020. The benefits of a digital currency were mostly linked to overcoming financial exclusion. However, the dollar remains less than 0.1 per cent of the currency in circulation and of broad money in The Bahamas.

(Source: The Nassau Guardian)