Thanks to COVID measures, the local economy may not recover until 2022.
A representative for the International Monetary Fund has said the Marshall Islands’ digital sovereign currency would currently pose a risk to the islands’ financial stability.
Following a March consultation, International Monetary Fund, or IMF, representative Yong Sarah Zhou said the issuance of the Marshall Islands’ digital sovereign currency, called SOV, as legal tender would “raise risks to macroeconomic and financial stability as well as financial integrity” of the islands. According to Zhou, the measures the Republic of the Marshall Islands, or RMI, took to contain COVID-19 may have been “swift and strong,” but also strained the local economy.
“The issuance of the SOV could jeopardize the RMI’s last USD corresponding banking relationship,” said Zhou. “This combined with anti-money laundering and combatting the financing of terrorism risks (including those related to the SOV) could disrupt external aid and other important financial flows, resulting in a significant drag on the economy.”
She added that the “cautious approach” towards the SOV already in place was warranted, given that the “potential cost of the SOV issuance will likely outweigh the expected benefits.” According to the IMF representative, the RMI’s gross domestic product fell more than 3% in FY2020 and is expected to decline another 1.5% this fiscal year with a possible recovery of the local economy in 2022.
“The RMI’s legal, regulatory, and institutional framework is not yet ready to accommodate the SOV issuance and manage associated risks.”
Government officials first announced the RMI would be exploring the creation of a digital currency in 2018, one that could be used as legal tender alongside the U.S. dollar — though the Marshall Islands are a sovereign state, they are also an associated state with the U.S. In June, a crypto advisor to the islands said that the RMI was conducting an 18-month test phase for “preSOV,” a token which can later be converted into SOV.
Central bank digital currencies have had some success in areas spread across multiple islands. For example, the Bahamas launched its Sand Dollar digital currency in October, aimed at driving greater financial inclusion within the archipelago nation of more than 700 islands. There are more than 58,000 people in the RMI spread across 29 atolls and 5 islands, 24 of which are inhabited.