## Palau’s Banking System ## Source details **Canonical URL:** [Palau’s Banking System](https://www.imf.org/-/media/files/publications/cr/2026/english/1plwea2026002-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1plwea2026002-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1plwea2026002-source-pdf.pdf.json) --- ### Background and key impediments - Banking structure: - Three branches of U.S. FDIC-insured banks, two small non-FDIC-insured banks, and one state-owned development bank (NDBP). - The U.S. branches (Bank of Guam, Bank of Hawaii, Bank Pacific) account for 98 percent of total deposits. - Balance-sheet features: - Net foreign assets amount to nine times greater than domestic private sector credit. - Total bank credit: around 25 percent of GDP. - Commercial banks’ credit: slightly over 10 percent of GDP. - Market behavior: - Deposit base growing but commercial bank lending remains very limited and concentrated offshore due to U.S. headquarter funding and investment practices. - Size indicators (preserved): - Commercial banks’ total assets (end-FY2024): USD 416 million. - NDBP assets (FY2024): USD 44.7 million (equivalent to 11 percent of commercial banks’ assets). - In FY2024, NDBP’s loan portfolio accounted for 51.4 percent of overall private sector credit. ### Role and constraints of the National Development Bank of Palau (NDBP) - Functions and portfolio: - NDBP provides about half of total domestic credit. - Portfolio composition: around three quarters housing loans; aquaculture 2 percent; commercial loans 20 percent. - Funding and governance: - Does not accept deposits; funded primarily through long-term borrowings and loan repayments. - Lending decisions reflect development objectives. - NDBP is not currently formally licensed and supervised by the FIC. - Performance and risks: - Well capitalized; returned to profitability in FY2024 earning USD 1.3 million and ROA of 2.94 percent. - One of the lowest NPL ratios (less than one percent as of FY2025) among Pacific Island development banks before the Pandemic. - Constraints: funding constraints due to lack of deposit-taking; reliance on government and external borrowing; historical periods of relatively high NPLs prompting governance reforms. ### Structural impediments to financial intermediation - Lending practices: - Commercial bank lending is significantly lower than peers and mainly consists of unsecured, small-sized loans to individuals. - Approximately two-thirds of total loans and advances from commercial banks are unsecured (FIC report). - Legal constraints on interest rates: - Usury law caps commercial lending interest at the U.S. prime rate plus 4 percentage points — which amounted to 11 percent as of November 2025. - Interest rate on individual/personal loans capped at 18 percent by law; stood at 11.6 percent in FY2024. - NDBP is exempt from usury law but maintains lending within the same ceilings. - Information asymmetry and credit history: - U.S. bank branches often require a U.S. FICO score; borrowers without a U.S. Social Security number lack credit history recording once loans are repaid. - SME constraints: lender requirements for two years of audited financial statements; many SMEs lack sufficient financial records and business plans. - Ongoing effort to establish a credit registry with ADB assistance; effectiveness contingent on integration with the U.S. system. - Collateral limitations: - Only residents can hold land titles with limited exceptions; communal landownership and limited fee-simple properties restrict use of fixed property as collateral. - Secured Transaction Act (2012) ensures enforceability of security interests in personal property, excluding land, but has not significantly increased collateralized lending. - NDBP remains the only institution accepting land as collateral and provides housing loans and SME financing. ### Payment system inefficiencies and access - Currency and clearing: - Palau uses the U.S. dollar; lacks a domestic payment system and depends on U.S. financial market infrastructure. - Clearing checks in Palau typically takes four to five business days. - Usage and infrastructure: - Cash and checks dominate retail transactions; credit and debit cards widely accepted in tourist establishments. - Internet penetration: 57.5 percent in 2025. - Mobile subscriptions: over 25,000, equivalent to 144 percent of the population (2025). - Cross-border payments limited at around 0.7 percent of GDP as of 2023; reliant on correspondent banking, international money transfer operators, and card schemes. - Market-scale constraints: - Small market size and remote islands impede attraction of Payment Service Providers (PSPs) and access to banking services for remote residents. - High transaction costs reported for cross-border wire transfers. ### Opportunities and risks of fintech and digital initiatives - Palau Savings Bond (PSB) — blockchain-based retail bond: - Objective: mobilize domestic savings, provide additional saving options, retain deposits domestically; funds expected to be channeled through NDBP to finance infrastructure, housing, and small businesses. - Design: retail system using blockchain-based distributed ledger technology; support from Japan and blockchain firm Soramitsu. - Pilot: demonstrated in late FY2024; bond not yet issued. - Operational risks and needs: - Fiscal costs for maintaining the digital platform including cybersecurity, external legal scrutiny, and operational costs. - NDBP channeling funds poses fiscal and systemic risks given NDBP is not formally supervised by FIC. - Need for strengthened NDBP risk management, timely identification/monitoring/mitigation of risks, and formalizing supervision by FIC. - Requirement for widespread digital and financial literacy, extensive public education, and clear disclosures. - Government of Japan supporting development costs for PSB. - Tokenized Dollar (TD) — government-backed stablecoin initiative: - Pilot history and status: - Project announced November 2021; partnered with Ripple March 2022; pilot launched October 2022 (200 government employees received 100 PSC each for purchases); pilot analyzed 2023–2025; Payment System Bill at OEK July 2025; next steps undecided. - Proposed design: - Issued by the Ministry of Finance, redeemable 1:1 to the U.S. dollar, fully backed by reserves (cash, treasury securities, and other safe assets) managed by the Ministry of Finance; would require legal bill approval, supporting regulations, and a custodian bank partnership. - Intended benefits: - Make payments easier and more affordable, improve financial inclusion, and support a more modern and efficient digital economy. - Operational challenges and limitations: - Difficulty finding a custodian bank halted progress after the pilot. - Fiscal and operational costs and unclear cost-sharing model among users, PSPs, and the government. - Potential low uptake due to preference for cash, lack of buy-in from the two main commercial banks, and inadequate IT infrastructure. - Proposed use cases (retail P2B, government payments including customs, P2P transfers) may not be fully justified relative to alternatives such as mobile money or improving the existing payment system. - Cross-border use requires legal agreements and collaboration with other jurisdictions; outward remittances dominate Palau, and remittances are not a primary national-level financial inclusion issue. - Tokenized dollar may not adequately address financial inclusion challenges in remote islands where banking facilities for redemption are lacking. ### Key statistics and indicators (preserved) - Commercial banks account for 98 percent of total deposits. - Net foreign assets: nine times greater than domestic private sector credit. - Total bank credit: around 25 percent of GDP. - Commercial banks’ credit: slightly over 10 percent of GDP. - NDBP assets (FY2024): USD 44.7 million. - Commercial banks’ total assets (end-FY2024): USD 416 million. - NDBP share of private sector credit (FY2024): 51.4 percent. - NDBP profitability (FY2024): USD 1.3 million; ROA 2.94 percent. - Commercial banks’ ROA (FY2023 average): 3.28 percent; NPL rate (FY2023): 0.38 percent. - Usury law cap on commercial lending: U.S. prime rate plus 4 percentage points — 11 percent as of November 2025. - Individual/personal loan legal ceiling: 18 percent; individual loan rate stood at 11.6 percent in FY2024. - Internet penetration: 57.5 percent (2025). - Mobile subscriptions: over 25,000; 144 percent of the population (2025). - Cross-border payments: around 0.7 percent of GDP (2023). - Pilot of tokenized dollar: October 2022 (200 government employees received 100 PSC each). ### Key risks of tokenized dollars (TD) - AML/CFT and financial integrity: - TD can attract illicit activities and pose considerable AML/CFT and associated financial integrity risks. - TD present specific vulnerabilities: anonymity, rapid cross-border transfers, potential for layering illicit funds. - Require a thorough ML/TF risk assessment to guide mitigation measures and legal amendments. - Legal framework should explicitly address ML/TF risks with clear provisions for customer due diligence, transaction monitoring, suspicious transaction reporting. - Framework must align with the FATF Recommendations on virtual assets (VAs) and virtual asset service providers (VASPs). - Operational and cyber risks: - Cybersecurity vulnerabilities and overreliance on specific vendors and technologies are major concerns. - Use of public ledgers raises privacy concerns as transaction details may become publicly accessible and subject to misuse. - Gaps remain: adoption of ISO27001 is in early stages; the cyber-crime bill remains in draft form. - Overreliance on vendors/third parties can create fragmentation and vulnerabilities. - Fiscal and peg risks: - Operational costs (infrastructures, salaries, energy), and the government’s backing of reserves create budgetary challenges and fiscal risks. - If reserves are inadequate, stability of the peg may not be guaranteed and tokenized dollars can be vulnerable to speculative attacks. - TD is backed by the government; government bears ultimate responsibility for redemption, implying fiscal risks. - Institutional capacity: - The Financial Institutions Commission (FIC) and the Ministry of Finance (MOF) have critical roles; their institutional capacity needs to be significantly strengthened. - FIC currently faces capacity and resource constraints; FIC should ringfence risks, e.g., by supervising custodian bank creditworthiness. ### Policy issues and recommendations — enhancing intermediation and managing digital initiatives - Strengthen banking supervision and regulatory framework: - Address structural impediments and enhance supervision and regulations in the banking system. - Bringing NDBP under FIC supervision would help safeguard financial stability and facilitate more efficient resource reallocation. - Re-evaluate the Usury Law which imposes a lending rate cap. - Improve credit information and collateral frameworks: - Support from the ADB is establishing a centralized credit bureau to collect borrowers' credit histories. - Consider clarifying legal uncertainties for foreign banks regarding land titles and foreclosure procedures to overcome barriers related to using land as collateral. - PSB implementation safeguards: - Establish well-established institutional arrangements, and a robust legal and regulatory framework. - Assess/manage costs of the digital platform, fiscal risks from on-lending to NDBP, spillover effects of interest rates paid on the PSB to other NDBP loans, and potential AML/CFT risks. - Equip the debt management office to manage debt issuance, conduct risk assessment, and ensure consistency with overall debt management strategy. - Conduct fiscal risk assessment integrating PSB implications. - Public education and clear prospectus outlining institutional arrangements for bond management, redemption, and transfer of funds between the treasury and NDBP. - Infrastructure setup and costing: issuance platform, settlement system, central securities depository (CSD), and debt recording system. - Coupon rates and maturity structure must balance demand and fiscal costs while mitigating maturity mismatches. - Preconditions before launching TD (summary): - Legal framework: clarify TD’s legal status; develop bankruptcy laws, privacy and data protection laws, and a cybercrime bill; define roles/responsibilities for custodian bank, wallet providers. - Prudential and conduct frameworks: reserve asset management; stabilization mechanism; segregation policies; disclosure and independent audits; clarity on redemption policies; regulations for wallets, exchanges, and exposures; benchmarking against international standards (FSB/IOSCO); outsourcing rules; supervisory framework for operational resilience; capacity to enforce compliance; storage of private keys. - Governance: ringfence TD reserves from fiscal use; explore oversight options; MoF or designated agency to assume central bank functions for transparency in reporting. - AML/CFT: align with FATF Recommendations; identify supervising entity and ensure supervisory capacity. - IT and cyber: strengthen incident response, business continuity, and reduce overreliance on vendors; address low digital literacy and suboptimal internet connectivity in remote islands. - Resources: ensure infrastructure, Digital IDs, internet/broadband connectivity, secure core systems, technology governance, and human capital. - Feasibility and cost-benefit: conduct an independent feasibility study to identify risks, assess market demand, evaluate technology/infrastructure, review legal/regulatory framework, and determine financial viability. - Public trust: certify agreements and ensure funds properly approved; address pilot vulnerabilities identified in the Public Auditor report. - Reserve management: establish transparent, verifiable system for managing reserves. - National payment system strategy and alternatives: - Priority: establish a national payment system suitable to Palau’s size and resources and develop a comprehensive domestic payment strategy before launching individual digital/fintech initiatives. - System objectives: foster competition; require robust physical infrastructure; be supported by policies enhancing financial and digital literacy, improved telecom infrastructure, and a strong legal/regulatory framework. - Alternatives to TD: fast payment systems or mobile money. - Licensing and promotion of mobile money operators (MMOs) could be beneficial given mobile connectivity equivalent to 144 percent of the population. - E-money issuers should be properly supervised to ensure AML/CFT compliance and address cyber concerns. *IMF staff summary based on “Palau’s Banking System.”* ### 1. Palau’s Banking System _________________________________________________________________ 7 ### Palau’s Banking System ### Background and key impediments - Banking structure: three branches of U.S. FDIC-insured banks, two small non-FDIC-insured banks, and one state-owned development bank (NDBP). The U.S. branches (Bank of Guam, Bank of Hawaii, Bank Pacific) account for 98 percent of total deposits. - Net foreign assets amount to nine times greater than domestic private sector credit. - Total bank credit: around 25 percent of GDP; commercial banks’ credit: slightly over 10 percent of GDP. - Deposit base growing but commercial bank lending remains very limited and concentrated offshore due to U.S. headquarter funding and investment practices. - As of end-FY2024, total assets of commercial banks amounted to USD 416 million; NDBP held USD 44.7 million in assets (equivalent to 11 percent of commercial banks’ assets). - In FY2024, NDBP’s loan portfolio accounted for 51.4 percent of overall private sector credit. ### Role and constraints of the National Development Bank of Palau (NDBP) - NDBP provides about half of total domestic credit—one of the highest shares among Pacific Islands. - Portfolio composition: around three quarters housing loans; aquaculture 2 percent; commercial loans 20 percent. - Funding model: does not accept deposits; funded primarily through long-term borrowings and loan repayments; lending decisions reflect development objectives. - NDBP capital and performance: well capitalized; one of the lowest NPL ratios (less than one percent as of FY2025) among Pacific Island development banks before the Pandemic; returned to profitability in FY2024 earning USD 1.3 million and ROA of 2.94 percent. - Constraints and risks: funding constraints due to lack of deposit-taking; NDBP is not currently formally licensed and supervised by the FIC; reliance on government and external borrowing; historical periods of relatively high NPLs prompting governance reforms. ### Structural impediments to financial intermediation - Lending practices: - Commercial bank lending is significantly lower than peers and mainly consists of unsecured, small-sized loans to individuals. - Approximately two-thirds of total loans and advances from commercial banks are unsecured (FIC report). - Legal constraints: - Usury law caps commercial lending interest at the U.S. prime rate plus 4 percentage points — which amounted to 11 percent as of November 2025. - Interest rate on individual/personal loans capped at 18 percent by law; stood at 11.6 percent in FY2024. - NDBP is exempt from usury law but maintains lending within the same ceilings. - Information asymmetry: - Lender requirements at U.S. bank branches often require a U.S. FICO score; borrowers without a U.S. Social Security number lack credit history recording once loans are repaid. - SME constraints: lender requirements for two years of audited financial statements; many SMEs lack sufficient financial records and business plans. - Ongoing effort to establish a credit registry with ADB assistance; effectiveness contingent on integration with the U.S. system. - Collateral limitations: - Only residents can hold land titles with limited exceptions; communal landownership and limited fee-simple properties restrict use of fixed property as collateral. - Secured Transaction Act (2012) ensures enforceability of security interests in personal property, excluding land, but has not significantly increased collateralized lending. - NDBP remains the only institution accepting land as collateral and provides housing loans and SME financing. ### Payment system inefficiencies and access - Currency and clearing: - Palau uses the U.S. dollar; lacks a domestic payment system and depends on U.S. financial market infrastructure. - Clearing checks in Palau typically takes four to five business days. - Payment behavior and infrastructure: - Cash and checks dominate retail transactions; credit and debit cards widely accepted in tourist establishments. - Internet penetration: 57.5 percent in 2025 (compared to around 80 percent globally in 2025). - Mobile subscriptions: over 25,000, equivalent to 144 percent of the population (vs. 105–110 percent globally). - Cross-border payments limited at around 0.7 percent of GDP as of 2023; reliant on correspondent banking, international money transfer operators, and card schemes. - Market scale limitations: - Small market size and remote islands impede attraction of Payment Service Providers (PSPs) and access to banking services for remote residents. - High transaction costs reported for cross-border wire transfers. ### Opportunities and risks of fintech and digital initiatives - Palau Savings Bond (PSB) — blockchain-based retail bond: - Objective: mobilize domestic savings, provide additional saving options, retain deposits domestically; funds expected to be channeled through NDBP to finance infrastructure, housing, and small businesses. - Design: retail system using blockchain-based distributed ledger technology; support from Japan and blockchain firm Soramitsu. - Pilot: demonstrated in late FY2024; bond not yet issued. - Risks and operational challenges: - Fiscal costs for maintaining the digital platform including cybersecurity, external legal scrutiny, and operational costs. - NDBP channeling funds poses fiscal and systemic risks given NDBP is not formally supervised by FIC. - Need for strengthened NDBP risk management, timely identification/monitoring/mitigation of risks, and formalizing supervision by FIC. - Requirement for widespread digital and financial literacy, extensive public education, clear disclosures, and strong public understanding of risks. - Government of Japan supporting development costs for PSB. - Tokenized Dollar (TD) — government-backed stablecoin initiative: - Pilot history: project announced November 2021; partnered with Ripple March 2022; pilot launched October 2022 (200 government employees received 100 PSC each for purchases); pilot analyzed 2023–2025; Payment System Bill at OEK July 2025; next steps undecided. - Proposed design: issued by the Ministry of Finance, redeemable 1:1 to the U.S. dollar, fully backed by reserves (cash, treasury securities, and other safe assets) managed by the Ministry of Finance; would require legal bill approval, supporting regulations, and a custodian bank partnership. - Intended benefits: make payments easier and more affordable, improve financial inclusion, and support a more modern and efficient digital economy; potential to make payments cheaper, faster, and more convenient. - Operational challenges and limitations: - Difficulty finding a custodian bank halted progress after the pilot. - Fiscal and operational costs and unclear cost-sharing model among users, PSPs, and the government. - Potential low uptake due to preference for cash, lack of buy-in from the two main commercial banks, and inadequate IT infrastructure. - Proposed use cases (retail P2B, government payments including customs, P2P transfers) may not be fully justified relative to alternatives such as mobile money or improving the existing payment system. - Cross-border use requires legal agreements and collaboration with other jurisdictions; outward remittances dominate Palau, and remittances are not a primary national-level financial inclusion issue. - Tokenized dollar may not adequately address financial inclusion challenges in remote islands where banking facilities for redemption are lacking. ### Key statistics and indicators (preserved) - Commercial banks account for 98 percent of total deposits. - Net foreign assets: nine times greater than domestic private sector credit. - Total bank credit: around 25 percent of GDP. - Commercial banks’ credit: slightly over 10 percent of GDP. - NDBP assets (FY2024): USD 44.7 million. - Commercial banks’ total assets (end-FY2024): USD 416 million. - NDBP share of private sector credit (FY2024): 51.4 percent. - NDBP profitability (FY2024): USD 1.3 million; ROA 2.94 percent. - Commercial banks’ ROA (FY2023 average): 3.28 percent; NPL rate (FY2023): 0.38 percent. - Usury law cap on commercial lending: U.S. prime rate plus 4 percentage points — 11 percent as of November 2025. - Individual/personal loan legal ceiling: 18 percent; individual loan rate stood at 11.6 percent in FY2024. - Internet penetration: 57.5 percent (2025). - Mobile subscriptions: over 25,000; 144 percent of the population (2025). - Cross-border payments: around 0.7 percent of GDP (2023). - Pilot of tokenized dollar: October 2022 (200 government employees received 100 PSC each). *IMF staff summary based on “Palau’s Banking System.”* ### 10. Tokenized dollars entail significant risks. Without robust regulation, TD can attract illicit ### 10. Tokenized dollars entail significant risks. Without robust regulation, TD can attract illicit ### Key risks of tokenized dollars (TD) - TD can attract illicit activities and pose considerable AML/CFT and associated financial integrity risks. - Poor execution may lead to reputational risks, undermining public confidence and hindering effective adoption. - Cybersecurity vulnerabilities and overreliance on specific vendors and technologies are major concerns. - Use of public ledgers raises privacy concerns as transaction details may become publicly accessible and subject to misuse, compromising confidentiality of personal financial data. - Operational costs (infrastructures, salaries, energy), and the government’s backing of reserves create budgetary challenges and fiscal risks. - If reserves are inadequate, stability of the peg may not be guaranteed and tokenized dollars can be vulnerable to speculative attacks. - The Financial Institutions Commission (FIC) and the Ministry of Finance (MOF) have critical roles; their institutional capacity needs to be significantly strengthened. ### Policy issues — Enhancing financial intermediation and mobilizing domestic credit - Address structural impediments and enhance supervision and regulations in the banking system. - Support from the ADB is establishing a centralized credit bureau to collect borrowers' credit histories to help banks assess risks and encourage responsible lending. - Consider clarifying legal uncertainties for foreign banks regarding land titles and foreclosure procedures to overcome barriers related to using land as collateral. - Re-evaluate the Usury Law which imposes a lending rate cap. - Bringing NDBP under FIC supervision would help safeguard financial stability and facilitate more efficient resource reallocation. - Diversify the domestic economy and improve the business environment to develop the private sector and increase demand for bank credit. ### Palau Savings Bond (PSB) — implementation considerations - Implementation of the blockchain-based PSB needs well-established institutional arrangements, and a robust legal and regulatory framework. - Benefits: channel funding towards domestic economic development. - Risks/costs to assess and manage: - Costs of the digital platform. - Fiscal risks from on-lending to NDBP. - Spillover effects of interest rates paid on the PSB to other NDBP loans. - Potential AML/CFT risks, particularly if cross-border investments are allowed. - Required safeguards: legal, supervisory and regulatory frameworks (e.g., AML/CFT framework). - The debt management office should be equipped with resources and a mandate to manage debt issuance, conduct risk assessment, and ensure consistency with overall debt management strategy. - Fiscal risk assessment must integrate PSB implications. - Clarify institutional arrangements for oversight of investment decisions and supervision of fund transfers. - Public education is required to ensure sufficient digital and financial literacy for broad participation. - The prospectus should outline institutional arrangements for bond management, redemption, and transfer of funds between the treasury and NDBP. - Infrastructure setup to plan and cost: issuance platform, settlement system, central securities depository (CSD), and debt recording system. - Coupon rates and maturity structure must balance demand and fiscal costs while mitigating maturity mismatches. ### Improving payment system efficiency — legal framework and strategic approach - Developing a sound legal framework to govern the national payment system is critical. - The Palau Digital Service Bill (PDSB) was submitted to Congress to modernize Palau’s payment system and introduce fintech initiatives, including the tokenized dollar. - The bill needs clarification on key building blocks (see ¶14) with technical support from the World Bank and IMF. - A comprehensive domestic payment strategy is recommended before launching individual digital and fintech initiatives. ### Preparations and gaps to address before launching TD (summary of ¶14) - Legal Framework: - Clarify the tokenized dollar’s legal status and implications. - Address potential conflicts of interest and resource constraints of the Ministry of Finance (MoF). - Define roles/responsibilities of entities such as the custodian bank holding reserve assets, and wallet providers. - Develop bankruptcy laws, privacy and data protection laws, and a cybercrime bill. - Note: Bankruptcy laws: rights of holders in the event of insolvency of financial intermediaries, such as wallet provider. - Prudential and Conduct Frameworks: - Key areas include: - (i) reserve asset management including composition and investments to ensure safety and liquidity of reserves, custody and concentration risks, - (ii) stabilization mechanism to safeguard the peg (ensure that reserves cover the stablecoins issued and stablecoins are redeemed at par), - (iii) segregation policies for reserve assets, - (iv) disclosure and periodic independent audits, - (v) lack of clarity on redemption policies, - (vi) regulations governing wallets, exchanges and financial institutions exposures, - (vii) regulations not benchmarked against international standards (international standards for stablecoins, FSB/IOSCO) to identify gaps, - (viii) outsourcing regulations, - (ix) the supervisory framework for operational resilience, - (x) capacity to enforce compliance with regulations, - (xi) storage of private keys. - Governance and Institutional Arrangement: - Absence of a central bank or alternative governance arrangements adds complexity. - TD reserves should be strictly ringfenced from potential fiscal use. - Explore options to strengthen oversight to ensure proper governance; MoF or a designated agency should adequately assume central bank functions such as transparency in reporting on issuance and activity. - AML/CFT Measures and Supervision: - TD present specific vulnerabilities: anonymity, rapid cross-border transfers, potential for layering illicit funds. - Require a thorough ML/TF risk assessment to guide mitigation measures and legal amendments. - Legal framework should explicitly address ML/TF risks with clear provisions for customer due diligence, transaction monitoring, suspicious transaction reporting. - Framework must align with the FATF Recommendations on virtual assets (VAs) and virtual asset service providers (VASPs). - Clearly identify the supervising entity and ensure sufficient supervisory capacity. - IT Operational and Cyber Risk Framework: - Progress has been made, but gaps remain. - Adoption of ISO27001 is in early stages; the cyber-crime bill remains in draft form. - Overreliance on vendors/third parties can create fragmentation and vulnerabilities. - Gaps in arrangements for responding to cyber security events pose major risks. - Low banking penetration may mean low digital literacy, widening cyber risk exposure. - Suboptimal internet connectivity in remote islands would limit roll-out. - Resources: - Infrastructure: access, stability, availability of critical national systems; adequacy of enablers such as Digital IDs; Internet and broadband connectivity; threshold security and governance requirements for sector participants. - Technology: core systems must be fit-for-purpose, governed, scalable, secure, efficient; technology governance, IT management, access/identity controls, incident response, business continuity required. - Human capital: raise risk awareness; onboarding unaware individuals increases attack surface. - Feasibility and Cost-benefit Analysis: - Conduct a feasibility study to identify risks, assess market demand, evaluate technology/infrastructure, review legal/regulatory framework, determine financial viability and operational capacity. - To avoid conflicts of interest, the analysis should preferably be done by an independent agency since MoF manages the TD project. - Public Trust: - Ensure all associated agreements are certified and funds properly approved. - Address risks and vulnerabilities identified from pilots in the Public Auditor report. - Reserve Management: - TD is backed by the government; government bears ultimate responsibility for redemption, implying fiscal risks. - Establish a transparent and verifiable system for managing reserves. - Capacity of FIC: - FIC should ringfence risks, e.g., by supervising custodian bank creditworthiness. - FIC currently faces capacity and resource constraints. ### National payment system and alternatives (¶15) - Establishing a national payment system suitable to Palau’s size and resources is the key priority and would benefit from a comprehensive domestic payment strategy. - A national payment system comprises arrangements, technical infrastructure, instruments, and processes enabling fund transfers between individuals, businesses, governments, and organizations. - Strategy should assess current strengths/weaknesses, identify urgent components of payment infrastructure, and explore options suited to Palau’s economic size and capacity constraints. - The payment system should: - Foster competition. - Require robust physical infrastructure. - Be supported by policies enhancing financial and digital literacy, improved telecom infrastructure, and a strong legal/regulatory framework. - Alternative options to TD include fast payment systems or mobile money. - Licensing and promotion of mobile money operators (MMOs) could be beneficial: Palau has mobile connectivity equivalent to 144 percent of the population. - MMOs tend to reach further than bank accounts, especially in rural and hard-to-reach areas. - E-money issuers should be properly supervised to ensure AML/CFT compliance and address cyber concerns. - Case study lessons from the Solomon Islands are noted. ### Box 2 — Advancing Digital Payments in the Solomon Islands (key points) - Context and challenges: - Population dispersed across more than 1,000 islands. - In 2020, cash remained the dominant payment method, accounting for about 80 percent of transactions. - Financial access was limited; bank branches and ATMs concentrated in the capital, Honiara. - Regulatory gaps in cybersecurity, AML for digital transactions, and financial consumer protection. - Reforms and infrastructure: - Payment System Act (2022) empowered the Central Bank of Solomon Islands (CBSI) to oversee the sector. - In April 2024, CBSI launched the Solomons Automated Transfer System (SOLATS). - SOLATS core components: - Real-Time Gross Settlement (RTGS) for immediate settlement of large-value and time-critical transactions. - Automated Clearing House (ACH) for batch processing of retail and low-value payments. - Outcomes: - SOLATS reduced settlement times from days to real time and facilitated new products/services for unbanked and underbanked populations. - Collaboration with partners supported private sector innovation, including mobile money. - M-SELEN mobile money platform: over 350,000 registered users (i.e. half of the population) and operates through 3,000 agents; provides instant P2P and P2B payments, cash-in and cash-out, and partnered with RIA Money Transfer for cross-border remittances. - Remaining challenges: - Regulatory gaps in cybersecurity, AML compliance, fintech oversight, and data protection. - Absence of a national digital ID complicates KYC processes. - Low digital and financial literacy, limited connectivity, and high costs of internet and electricity hinder adoption; many businesses still rely on cash and checks. *International Monetary Fund — Republic of Palau, Chapter: Tokenized dollars and payment system considerations* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1plwea2026002-source-pdf.pdf_