CBDCs and Liquidity Risks: Evidence from the SandDollar’s Impact on Deposits and Loans in the Bahamas

This study evaluates the early impact of Central Bank Digital Currencies (CBDCs) on key financial indicators in The Bahamas, focusing on the introduction of the SandDollar—the world’s first fully implemented retail CBDC. Using the Synthetic Control Method (SCM), the analysis constructs counterfactual scenarios to assess the effects of CBDCs on three dependent variables: outstanding loans from commercial banks as a percentage of GDP, outstanding deposits as a percentage of GDP, and the number of deposit accounts per 1000 adults. Three separate SCM models were estimated for the period 2014–2024, incorporating a broad set of control variables reflecting financial infrastructure, economic performance, demographic characteristics, and digital readiness. The findings consistently show that the SandDollar’s implementation is associated with reductions in loan issuance, deposit levels, and deposit account ownership compared to their synthetic counterparts. These results support the hypothesis that direct CBDC models may amplify “deposit substitution” and increase liquidity risks by shifting financial activity away from commercial banks. Although the SCM provides a structured causal framework, the short post-treatment period and potential pandemic-related disruptions limit the scope of a long-term understanding. The study underscores the importance of careful CBDC design, particularly the role of intermediated models in mitigating unintended financial stability risks.