The International Monetary Fund (IMF), as part of its regular bilateral discussions with members and following a consultation with the Republic of the Marshall Islands (RMI), has advised the small nation against its plans to create a government-issued digital currency.
In February 2018, the RMI solidified plans for its digital currency to act as a second legal tender for the network of islands alongside the US dollar. The currency, the Sovereign (SOV), is planned for its own network, the "Yokwe framework"; it would avoid the anonymity of other digital currencies and, the RMI suggests, make it suitable for a regulated banking system. The Marshallese government gave its approval for the SOV to become legal tender once it was issued and distributed via an initial coin offering (ICO).
In a press release following the consultation, IMF directors encouraged RMI authorities to be cautious about issuing a decentralized digital currency and to "carefully consider the macroeconomic and financial stability risks." According to the IMF, "The potential benefits from revenue gains appear considerably smaller than the potential costs." Volatility and value of the SOV would also pose risks, it warned.
The attached staff report goes into further detail on the risks associated with issuing the SOV.
The IMF warned that unless strong anti-money laundering (AML) and anti-terrorism measures are implemented, issuance of the digital currency could elevate the risk of the RMI losing its last US dollar correspondent banking relationship (CBR). The loss of this relationship could be a major loss to the RMI.
The report explains:
"The law requires that all users of the SOV undergo standard 'Know Your Customer (KYC)' procedures and that their identity be recorded on the blockchain. However, neither the content of the 'standard KYC procedures,' nor the modalities of their implementation have been established."
"Considering the significant risks, staff recommends that the authorities seriously reconsider the issuance of the digital currency as legal tender."
If it were to go ahead as planned, the IMF points out that the SOV would be issued by an Israel-based startup with limited financial sector experience and significant conflicts of interest. Additionally, the report raises concerns that "the development and management of the SOV protocol are outside of the authorities' control and in the hands of a foreign private company."
The view of the Marshallese authorities was also included in the IMF documents:
"While acknowledging the risk from issuing the SOV, the authorities were confident that advanced technology would provide for sufficient risk mitigation."
The RMI plans to record the identity of SOV users on its blockchain and only trade SOV through government-approved exchanges. It would also implement a mechanism to automatically adjust SOV supply to combat price volatility. The RMI expects the launch of the SOV to take a number of years, and that financial costs related to issuance would be "borne by the foreign private company."
Because the SOV would be issued by an external company, it would not be considered a central bank digital currency (CBDC). The Marshall Islands has no central bank.
The RMI is one of a handful of countries committed to developing a national digital currency. In August, Venezuela announced its digital currency, the petro, would become an official unit of account.