IMF warns Marshall Islands against adopting digital currency

The International Monetary Fund (IMF) has warned the government of the Republic of the Marshall Islands (RMI) to be cautious about issuing a digital currency as a second legal tender and to ‘carefully consider the macroeconomic and financial stability risks’ inherent in such a move

In a report issued this month, the IMF say that the potential benefits from revenue gains could be considerably smaller than the potential costs arising from economic, reputational, and governance risks.

A private start-up based in Israel, which the IMF says has limited financial sector experience, will be in charge of the issuance of the currency, called the SOV, and will receive half of the initial SOV issuance.

‘The authorities expect sizeable revenue gains from the other half of the SOV issuance, which would help prepare for the reduction of U.S. Compact grant after FY2023: 20% of the initial coins accruing to RMI will be distributed to the resident RMI citizens to jump-start the use of the SOV, while the rest of initial coins will be allocated to trust funds to supplement the current Compact Trust Fund, support citizens who were affected by the previous U.S. nuclear tests, and finance infrastructure projects,’ says the report.

Plans to adopt the SOV are at an advanced state, according to the IMF, which has said: ‘A law was passed in February 2018 to recognize the SOV as second legal tender, signal the RMI’s strong commitment, and help the foreign private company secure the financing needed for the development of the technology for the new digital currency.’

It goes on to urge the RMI government to reconsider its plans.

‘While technology may help to address some of these risks, others would need to be mitigated through institutional changes. Furthermore, the use of the SOV as a means of exchange in transactions would require significant additional costs to upgrade the RMI’s telecommunication infrastructure,’ conclude the authors.

The IMF Marshall Islands report is here

Report by Rob Munro

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