## rdmea ## Source details **Canonical URL:** [rdmea](https://www.imf.org/-/media/files/publications/dp/2024/english/rdmea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2024/english/rdmea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2024/english/rdmea.pdf.json) --- ### Overview - The digital money revolution is progressing rapidly; policymakers in the Pacific island countries (PICs) are exploring digital money to develop payment systems and expand financial inclusion. - PICs face constraints due to geographic remoteness, small market size, dispersed populations, and progressive reductions in correspondent banking relationships (CBRs), which disproportionately impact PICs given their dependence on remittance flows. - The paper focuses mainly on e-money, stablecoins, and central bank digital currency (CBDC); unbacked crypto assets are discussed but are not considered “digital money” for the purpose of this paper. ### Potential benefits of digital money - If well designed and governed, digital money can: - Enhance financial inclusion and cross-border connectivity. - Improve efficiency, accessibility, and security of payments. - Streamline domestic payments and empower underserved populations to access financial services and government support. - Facilitate international payments, reduce remittance costs, and mitigate adverse impacts of CBR withdrawals. ### Potential risks and concerns - Ill-prepared adoption may lead to financial and economic disruptions, including: - Prolonged operational disruptions in PICs with low capacity and digital readiness, potentially triggering serious financial stability risks. - New money laundering and terrorist financing (ML/TF) risks, especially where AML/CFT frameworks are weak. - High costs and limited resources for PICs to develop digital money: technology development, training, and operational expenses. - Unbacked crypto assets are not suitable as official currency or means of payments and should not be supported by official sectors. ### Capacity constraints and prerequisites for adoption - Key prerequisites for successful adoption include: - Stable, available, secure, and accessible underlying digital infrastructure. - Business models that generate sustained revenue for digital money service providers. - Wide usage across multiple use cases, including by tourists in tourism-dependent PICs. - Clear legal and regulatory frameworks defining the legal status of digital money, obligations of service providers, user rights, and responsibilities of supervisory and competent authorities. - Given substantial capacity gaps, capacity development is crucial for introduction and adoption. ### Decision factors and design considerations - Decisions should depend on monetary and financial conditions, for example: - Existence of a national currency and maturity of domestic payment systems. - Countries with a national currency and mature banking/PSP sectors may find a two-tier CBDC model more suitable. - PICs without national currencies could consider foreign currency–based stablecoins as a realistic alternative, provided robust regulation and supervision are applied. - Unbacked crypto assets are not suitable as official means of payment. ### Recommended approach and next steps - Adopt a cautious, step-by-step approach: - Clearly define objectives for pursuing digital money. - Fully understand implications and plan concrete experiments to test assumptions and use cases. - Establish frameworks and regulations to address financial stability risks from weak digital resilience and to mitigate ML/TF risks from both traditional instruments and new digital money forms. - Consider a regional approach to overcome capacity and scalability constraints: - Interlink traditional domestic payment systems and, once available, CBDCs. - Set up or participate in multilateral digital payment platforms, regional networks, and knowledge-sharing arrangements. - Collaborate with development partners and international organizations, including the IMF, for technical assistance and experience sharing. ### Size of economy and structural context (2021 highlights) - The paper covers 12 PICs: Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. - Papua New Guinea has a total land area of 452,000 square kilometers (equal to around 87 percent of the region’s total land area) and a population close to 9 million people. - Two countries to date have adopted crypto assets as legal tender (Central Africa Republic, El Salvador). - Six of the 12 PICs do not have a national currency and use other countries’ currencies: Marshall Islands, Micronesia, and Palau use the US dollar; Kiribati and Nauru use the Australian dollar; Tuvalu uses the Australian dollar de facto. - These six countries lack a central bank and a publicly owned national payment system and rely on domestic commercial banks or external financial market infrastructures. ### Financial inclusion and payment systems (selected exact figures) - Ratio of adults to bank accounts in 2020: - Fiji 1 to 1.8; Micronesia about 1 to 0.37. - Cash in circulation to GDP in 2020: - Papua New Guinea 2.6 percent; Vanuatu 13.6 percent. - Average ratio of cash in circulation to GDP in six non-national-currency PICs: 9.3 percent (2020). - Caribbean small islands average cash in circulation to GDP: 8.7 percent. - Internet banking in Fiji during 2022: - FJD 3.3 billion over 5.7 million transactions; increases of 45.0 percent and 17.0 percent respectively versus preceding year. - Mobile/online banking outstanding balance in Fiji: 4.5 percent of GDP in 2020; deposit account balance share 68 percent (context). - Samoa value of mobile and online banking transactions: 3.5 percent of GDP in 2020. - World average digital infrastructure indicators (selected): - Access to Electricity 90.52; Fixed Broadband Subscriptions 15.89 (per 100 people); Mobile Cellular Subscriptions 106.15 (per 100 people). ### Digital infrastructure requirements and operational resilience (Box 3 highlights) - Systemic resilience and operational continuity: - Emphasize prevention and timely recovery; governance should include documented and tested disaster recovery, incident response, and business continuity arrangements. - Core technology components should be fit for purpose, have built-in redundancies, be up to date, be fully supported by vendors, and be appropriately managed for vulnerabilities. - Vendor reliance and internal capacity: - Vendor contracts should avoid lock-ins and include exit clauses; balance vendor reliance with internal oversight. - People, skills, and user risk awareness: - Skilled operational resources and risk-aware users are essential. - Processes, assurance, and testing: - Frequent review, independent reviews, and periodic stress tests recommended. - Digital identities and national strategies (regional status): - Digital identities present in Palau and Papua New Guinea. - National digital strategies in Fiji, Samoa, Tonga, Vanuatu. - Business models and use cases: - Providers need sustainable revenue models; adoption driven by diverse use cases and achieving a “critical mass” given high fixed costs. ### Financial integrity, AML/CFT, and legal considerations - Virtual assets and stablecoins present ML/TF risks; FATF Standards require countries to assess ML/TF risks of new products and technologies. - Key AML/CFT considerations: - CBDC ecosystem scope, level of intermediation and allocation of AML/CFT responsibilities, user identification and due diligence, monitoring AML/CFT compliance. - Legal framework needs: - Clear mandate to issue CBDC; legal clarity on holding and transfer of CBDC or government-backed stablecoins; safeguards for e-money safeguarding, segregation of client funds, and custodial arrangements. - Box 5 highlights for government-backed stablecoins: - Assess adequacy of legal framework and capacity of AML/CFT-competent authorities. - Ensure competent authorities have expertise to supervise, investigate, and prosecute activities involving stablecoins; consider training and technological tools. ### Design considerations and regional options - Design features for PICs: - Offline functionality to deal with poor network connectivity. - Onboarding features and simplified customer due diligence where low ML/TF risks are demonstrated. - Interoperability using international standards and common APIs. - Programmability and smart contracts for targeted disbursements. - Regional approaches to explore: - A. Interlink traditional domestic payment systems (G20 Building Block 13). - B. Interlink CBDCs (Building Block 19), once CBDCs exist. - C. Develop or join multilateral payment platforms: - i. Traditional centralized cross-border multi-currency systems (for example, Buna). - ii. “Pooled” stablecoin with multiregional regulation/oversight. - iii. Multifunctional digital platform that plugs in any type of digital money (for example, project mBridge, X-C). - Trade-offs: - Multifunctional regional platforms are promising but demanding; less complex options may be needed to address urgent CBR loss. ### Scenarios and empirical findings on financial inclusion and inequality (Annex highlights) - Panel regression (2004–2020) findings for PICs: - "A 1 percentage point increase in internet access is associated with about a 10- to 14-unit increase in deposit accounts per 1,000 adults and about a 1-unit increase in loan accounts per 1,000 adults, respectively." - Mobile phone access shows a similar but milder impact. - Scenario analysis (digital access raised to top-tier upper-middle-income levels): - Deposit accounts per 1,000 adults increase from 1,021 to 1,700. - Loan accounts per 1,000 adults increase from 114 to 165. - Micronesia and Papua New Guinea are among top gainers. - Fiscal support scenarios (10 percent of national income) distributed via digital money: - Scenario 2 (to banked poorest 20 percent) reductions in inequality range from 25 percent in Vanuatu to 37 percent in Fiji versus baseline. - Scenario 3 (to banked and unbanked poorest 20 percent) inequality is significantly reduced by more than half in Fiji, Samoa, Tonga, Vanuatu. - Annex Table 2.1 reported values (Scenario 2): Fiji 237; Tonga 224; Vanuatu 225; Samoa 233. - Annex Table 2.1 reported values (Scenario 3): Fiji 254; Tonga 260; Vanuatu 257; Samoa 260. ### Country-level operational and legal snapshots (selected) - Fiji (annex survey highlights): - National currency: Fiji dollar; exchange rate regime: conventional peg versus a currency composite. - "A total of 4.89 percent of total deposits was in foreign currency as of June 2022." - National Payment System reform underway; upgrade of FijiClear (RTGS) planned; Automated Clearing House for Electronic Funds Transfers and Instant Funds Transfers implemented in November 2023; efforts to include e-money issuers in automated clearing house network by end of 2024. - Six licensed banks; "10.7 bank branches/offices, 53 automated teller machines, and 790 point of sale terminals per 100,000 people." - "7.9 million transactions in 2021 compared to 4.9 million through direct credit transfers over internet banking in the same period." - "There is no digital identification system in place. A total of 29 percent of population lacks a birth certificate." - "There are no unbacked crypto assets used nor foreign or domestic stable coins used in Fiji. Cryptoasset activities are not regulated or banned." - Representative PIC operational notes (selected exact entries): - Palau: Digital identification system rolled out in 2022. - Papua New Guinea: Access to Electricity 60.40; Fixed Broadband Subscriptions 0.23; Mobile Cellular Subscriptions 53.85 (per 100 people). - Kiribati: No digital identification system; ANZ provides banking; no currency law. - Marshall Islands: Passed legislation in early 2018 to adopt a private crypto asset (SOV) as second legal tender; implementation on hold. - Vanuatu: 30.8 percent of total deposits was in foreign currency as of end of 2021; Reserve Bank exploring CBDC; Vanuatu Financial Services Commission amended Financial Dealers Licensing Act in 2021 to allow trading in digital assets. ### Conclusion and policy recommendations - Adopt a cautious, phased approach: define objectives, test use cases, strengthen infrastructure, and plan capacity development before large-scale issuance. - Prioritize legal, regulatory, and supervisory readiness: - Clarify mandates for CBDC issuance; ensure safeguards for e-money and stablecoin safeguarding and segregation. - Strengthen AML/CFT regimes, financial intelligence units, and law enforcement capacity. - Promote regional collaboration to achieve scale, interoperability, and shared capacity: - Interlink payment systems; consider multifunctional regional platforms; explore pooled stablecoin solutions with multiregional oversight only under robust regulation. - Policy stance on instruments: - Unbacked crypto assets should not be adopted as official currency or legal tender. - Foreign currency–based stablecoins may be an option for PICs without national currencies, but require strong regulation and supervision. - CBDC may be suitable for PICs with national currencies and sufficiently mature banking/PSP sectors; issuance in short to medium term is unlikely for most. *Source: IMF staff, Executive Summary (rdmea - Executive Summary).* ### Executive Summary ...............................................................................................vii ### Executive Summary ### Overview - The digital money revolution is progressing rapidly; policymakers in the Pacific island countries (PICs) are exploring digital money to develop payment systems and expand financial inclusion. - PICs face constraints due to geographic remoteness, small market size, dispersed populations, and progressive reductions in correspondent banking relationships (CBRs), which disproportionately impact PICs given their dependence on remittance flows. - The paper focuses mainly on e-money, stablecoins, and central bank digital currency (CBDC); unbacked crypto assets are discussed but are not considered “digital money” for the purpose of this paper. ### Potential Benefits of Digital Money - If well designed and governed, digital money can: - Enhance financial inclusion and cross-border connectivity. - Improve efficiency, accessibility, and security of payments. - Streamline domestic payments and empower underserved populations to access financial services and government support. - Facilitate international payments, reduce remittance costs, and mitigate adverse impacts of CBR withdrawals. ### Potential Risks and Concerns - Ill-prepared adoption may lead to financial and economic disruptions, including: - Prolonged operational disruptions in PICs with low capacity and digital readiness, potentially triggering serious financial stability risks. - New money laundering and terrorist financing (ML/TF) risks, especially where AML/CFT frameworks are weak. - High costs and limited resources for PICs to develop digital money: technology development, training, and operational expenses. - Unbacked crypto assets are not suitable as official currency or means of payments and should not be supported by official sectors. ### Capacity Constraints and Requirements for Adoption - Key prerequisites for successful adoption include: - Stable, available, secure, and accessible underlying digital infrastructure. - Business models that generate sustained revenue for digital money service providers. - Wide usage across multiple use cases, including by tourists in tourism-dependent PICs. - Clear legal and regulatory frameworks defining the legal status of digital money, obligations of service providers, user rights, and responsibilities of supervisory and competent authorities. - Given substantial capacity gaps, capacity development is crucial for introduction and adoption. ### Decision Factors and Design Considerations - Digital money decisions should depend on monetary and financial conditions, for example: - Existence of a national currency and maturity of domestic payment systems. - Countries with a national currency and mature banking/PSP sectors may find a two-tier CBDC model more suitable. - PICs without national currencies could consider foreign currency–based stablecoins as a realistic alternative, provided robust regulation and supervision are applied. - Unbacked crypto assets are not suitable as official means of payment. ### Recommended Approach and Next Steps - Adopt a cautious, step-by-step approach: - Clearly define objectives for pursuing digital money. - Fully understand implications and plan concrete experiments to test assumptions and use cases. - Establish frameworks and regulations to address financial stability risks from weak digital resilience and to mitigate ML/TF risks from both traditional instruments and new digital money forms. - Consider a regional approach to overcome capacity and scalability constraints: - Interlink traditional domestic payment systems and, once available, CBDCs. - Set up or participate in multilateral digital payment platforms, regional networks, and knowledge-sharing arrangements. - Collaborate with development partners and international organizations, including the IMF, for technical assistance and experience sharing. ### Contextual and Illustrative Statistics and Facts - The paper covers 12 PICs: Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. - Papua New Guinea has a total land area of 452,000 square kilometers (equal to around 87 percent of the region’s total land area) and a population close to 9 million people. - Two countries to date have adopted crypto assets as legal tender (Central Africa Republic, El Salvador). - The paper draws on lessons from six central banks with advanced CBDC projects. *Source: IMF staff, Executive Summary (rdmea - Executive Summary).* ### 1. Size of Economy in 2021 ### 1. Size of Economy in 2021 ### GDP per capita and development - Nominal GDP per capita (US dollars, 2021): some PICs were above $10,000 in 2021, while Kiribati, Solomon Islands, and Vanuatu were below $3,000. - Human Development Index rank (out of 189 countries, 2019): entries in source show values such as 134, 151, 140, 155, 136, 111, 117, 104, 93 (as listed in the table). ### External grants (Percent of GDP, 2021) - External grants vary across PICs; the source lists country-level grant shares illustrated on a chart (countries listed include Kiribati, Marshall Islands, Micronesia, Vanuatu, Solomon Islands, Papua New Guinea, Tuvalu, Samoa, Tonga, Nauru, Palau). ### Composition of public debt (Percent of GDP, 2020) - The source provides country-level composition of public debt for PICs (Kiribati, Marshall Islands, Micronesia, Vanuatu, Samoa, Solomon Islands, Papua New Guinea, Tuvalu, Tonga, Nauru, Palau, Fiji) summarized in chart form. ### Geography, remoteness, and maritime area - Land area (sq. kms) examples: entries include 1,706; 2,333; 2,970; 3,050; 3,880; 4,225; 4,637; 4,701; 4,749; 5,834; 10,139; 12,331 (country ordering corresponds to Tuvalu, Marshall Islands, Palau, Micronesia, Tonga, Kiribati, Samoa, Vanuatu, Fiji, Solomon Islands, Papua New Guinea in table layout). - Maritime area – exclusive economic zone (sq. kms) examples: 751,672; 1,992,022; 604,253; 2,992,415; 664,751; 3,437,132; 131,535; 827,626; 1,281,703; 1,596,464; 2,396,575. - Average sea distance between two habitants of the country (kms) examples: 11.1; 0.7; 2.9; 27.8; 2.5; 11.5; 1.6; 9.0; 0.7; 0.7; 177; 280; 14; 706; 105; 691; 19; 210; 71; 267. - Distance to nearest continent (kms) and liner shipping connectivity index are provided in charts with numeric scales; Pacific Islands average liner shipping connectivity value shown as 2,736 for the listed countries and Pacific Islands Avg. = 2,736. ### Natural disasters and climate vulnerability - Total number of natural disasters and related impacts for 2012–22 are tabulated by country (includes tropical cyclone, flood, landslide, drought, epidemic, earthquake, volcanic activity). - Impact of tropical cyclones: country examples listed include Vanuatu (2015), Fiji (2016), Tonga (2020), Samoa (2012). The source provides indicators such as total damages (percent of GDP) and population affected (percent of total population) in table form. ### Monetary landscape and payment systems - Six of the 12 PICs do not have a national currency and use other countries’ currencies: Marshall Islands, Micronesia, and Palau use the US dollar; Kiribati and Nauru use the Australian dollar; Tuvalu uses the Australian dollar de facto. - These six countries lack a central bank and a publicly owned national payment system and rely on domestic commercial banks or external financial market infrastructures. - Correspondent banking relationship (CBR) pressures: most PICs (except Fiji and Papua New Guinea) are experiencing CBR pressures. Example: Nauru is unable to access correspondent banking transactions in US dollar, Euro, British Pound, and Fiji dollar through Bendigo Bank Australia (Republic of Nauru: 2023 Article IV Consultation Staff Report). ### Financial inclusion and banking infrastructure - Number of commercial banks: - Kiribati and Nauru: one Australian bank each (ANZ in Kiribati; Bendigo Bank in Nauru). - Marshall Islands, Micronesia, Tuvalu: two banks each (payments activity concentrated in one). - Fiji: six banks. - Other PICs typically have four to five commercial banks. - Bank branches and deposit accounts: - Ratio of adults to bank accounts in 2020: Fiji 1 to 1.8; Micronesia about 1 to 0.37. - In Fiji, 81 percent of adults had access to formal financial services in 2020, compared to 64 percent in 2014. - Cash usage and ATMs: - Cash in circulation to GDP in 2020 ranged from 2.6 percent in Papua New Guinea to 13.6 percent in Vanuatu. - In the six PICs which do not use a national currency, the average ratio of cash in circulation to GDP was 9.3 percent in 2020; Caribbean small islands average was 8.7 percent. - Number of ATMs is increasing but remains low relative to Caribbean small states. ### Payment system modernization and fintech - National payment systems and upgrades: - Papua New Guinea: Kina Automated Transfer Systems (RTGS) and Papua New Guinea National Switch for card and mobile payments; plan to upgrade national payment strategy. - Fiji: FIJICLEAR real-time gross settlement; National Payment System Act passed in February 2021; upgraded real-time gross settlement in 2022 with straight-through processing and new central securities depository; Automated Clearing House for Electronic Funds Transfers and Instant Funds Transfers implemented in November 2023; efforts to include e-money issuers in automated clearing house network by end of 2024. - Tonga: launched real-time National Payment System in late 2021 (RTGS, automated clearing house, digital check processor, central securities depository). - Samoa, Solomon Islands, Vanuatu: in process of introducing digital payment systems (RTGS, automated clearing houses, central securities depositories) with World Bank/IFC support. - Foreign payment systems and PSPs operating in the region: VISA, Mastercard, Kovina, KlickEx, UnionPay International (with ANZ), and foreign online payment gateways (KlickEx, XE Money Transfer). ### Digital and mobile financial services - Mobile and online banking: - Internet banking example for Fiji in 2022: FJD 3.3 billion over 5.7 million transactions; increases of 45.0 percent and 17.0 percent respectively compared to the preceding year. - Value of mobile and online banking transactions: example Samoa 3.5 percent of GDP in 2020. - Outstanding balance of mobile and online banking accounts: Fiji 4.5 percent of GDP in 2020 (compared with 68 percent of balance in deposit accounts). - Registered mobile money accounts and transaction values (per charts): country examples include Tonga, Samoa, Fiji, Solomon Islands with 2014 and 2020 comparisons. - Digital infrastructure access (Table 2): selected data (percent or per 100 people): - Palau: Access to Electricity 100; Mobile Cellular Subscriptions 132.6 (per 100 people). - Fiji: Access to Electricity 100; Fixed Broadband Subscriptions 2.57 (per 100 people); Mobile Cellular Subscriptions 110.6. - Nauru: Access to Electricity 100; Mobile Cellular Subscriptions 92.39. - Tonga: Access to Electricity 100; Fixed Broadband Subscriptions 4.73; Mobile Cellular Subscriptions 58.66. - Samoa: Access to Electricity 100; Fixed Broadband Subscriptions 0.85; Mobile Cellular Subscriptions 52.00. - Tuvalu: Access to Electricity 99.69; Mobile Cellular Subscriptions 76.32. - Marshall Islands: Access to Electricity 99.16; Fixed Broadband Subscriptions 1.69; Mobile Cellular Subscriptions 27.03. - Kiribati: Access to Electricity 91.96; Fixed Broadband Subscriptions 0.15; Mobile Cellular Subscriptions 45.76. - Micronesia: Access to Electricity 82.93; Fixed Broadband Subscriptions 5.22; Mobile Cellular Subscriptions 19.13. - Solomon Islands: Access to Electricity 73.35; Fixed Broadband Subscriptions 0.15; Mobile Cellular Subscriptions 69.01. - Vanuatu: Access to Electricity 67.33; Fixed Broadband Subscriptions 0.91; Mobile Cellular Subscriptions 80.17. - Papua New Guinea: Access to Electricity 60.40; Fixed Broadband Subscriptions 0.23; Mobile Cellular Subscriptions 53.85. - World Average entries shown: Access to Electricity 90.52; Fixed Broadband Subscriptions 15.89; Mobile Cellular Subscriptions 106.15. - Digital infrastructure constraints: access to electricity, wireless, cellular, and broadband in most countries is lower than world average; connections are often expensive, unstable, and vulnerable to outages; submarine cables exist but last-mile connectivity and redundancy remain issues. ### Financial integrity and risk - Financial integrity concerns: - In 2016, FATF placed Papua New Guinea and Vanuatu on list of jurisdictions with strategic AML/CFT deficiencies (both since removed). - Some PICs were identified by the European Union as noncooperative jurisdictions for tax purposes. - Specific policy choices have raised concerns (example: Marshall Islands’ proposal to adopt a cryptocurrency as legal tender without mitigating measures; Vanuatu’s economic citizenship program). ### Socioeconomic challenges and role for digital money - Poverty and inequality: - Poverty rate measured as percentage of population living on less than $1.90 a day; PIC poverty rates higher than East Asia and Pacific average. - Micronesia, Papua New Guinea, and Solomon Islands have the highest poverty rates among PICs. - Income inequality: Micronesia, Papua New Guinea, and Tuvalu record the highest income inequality among PICs. - Exclusion from formal financial services: - Share of population excluded from formal financial services is significantly higher in PICs than Asian and middle-income peers. - The unbanked population is concentrated among the poorest. - Potential of digital money: - Digital money could potentially address limited and unequal access to financial services, high transaction costs from remoteness and dispersion, and support financial inclusion where infrastructure and regulatory capacity allow. ### Key statistics and indicators (selected, preserved exactly as in source) - Ratio of adults to bank accounts in 2020: Fiji 1 to 1.8; Micronesia about 1 to 0.37. - Cash in circulation to GDP in 2020: Papua New Guinea 2.6 percent; Vanuatu 13.6 percent. - Average ratio of cash in circulation to GDP in six non-national-currency PICs: 9.3 percent (2020). - Caribbean small islands average cash in circulation to GDP: 8.7 percent. - Internet banking in Fiji during 2022: FJD 3.3 billion over 5.7 million transactions; increases of 45.0 percent and 17.0 percent respectively versus preceding year. - Mobile/online banking outstanding balance in Fiji: 4.5 percent of GDP in 2020; deposit account balance share 68 percent (in context). - Samoa value of mobile and online banking transactions: 3.5 percent of GDP in 2020. - Selected digital infrastructure: World Average Access to Electricity 90.52; World Average Fixed Broadband Subscriptions 15.89 (per 100 people); World Average Mobile Cellular Subscriptions 106.15 (per 100 people). *Source: rdmea - 1. Size of Economy in 2021 (rdmea - 1. Size of Economy in 2021, IMF departmental paper content as provided).* ### 1. Poverty Rate ### 1. Poverty Rate ### Poverty and Income Distribution (Figures and Key Comparisons) - Poverty measure: Percentage of the population living on less than $1.90 a day at 2011 international prices. - Country-level observations shown (with years of data in parentheses): Marshall Islands (2019); Tonga (2015); Samoa (2013); Kiribati (2019); Fiji (2019); Tuvalu (2010); Vanuatu (2019); Micronesia (2013); Solomon Islands (2012). - Comparative aggregates shown: PICs (unweighted average of individual PICs shown in the figure), East Asia and Pacific (2019), Lower middle income (2018), Upper middle income (2019), High income (2019). ### Income Inequality (Figure and Comparisons) - Inequality measure: Share of top 20 percent to bottom 20 percent income. - Country-level observations shown (with years of data in parentheses): Kiribati (2019); Fiji (2019); Vanuatu (2019); Marshall Islands (2019); Solomon Islands (2012); Tonga (2015); Samoa (2013); Tuvalu (2010); Micronesia (2013). - Aggregate values (unweighted averages) provided for: PICs, East Asia and Pacific, and income categories (Lower middle income, Upper middle income, High income). - Data source: World Bank, World Development Indicator database. ### Financial Inclusion: Unbanked and Informal Financial Use (Figure 3) - Two indicators presented: - Share of adults using informal financial institutions or without a bank account (percent). - Share of unbanked population in the lowest quintile of income distribution (percent). - Country-level observations and years: Solomon Islands (2015); Vanuatu (2016); Samoa (2015); Tonga (2016); Fiji (2020) for first indicator; Samoa (2015); Fiji (2014); Vanuatu (2015); Tonga (2016) for second indicator. - Comparative aggregates shown: PICs, Lower middle income (2017), Upper middle income (2017), East Asia and Pacific (2017), High income (2017). - Data sources: Financial Services Demand Side Survey; and Findex database. ### Remittances and Correspondent Banking (Figure 4 and Narrative) - Remittances importance: - Remittances are a major source of income for several PICs and are highest in Tonga (equivalent to nearly 47 percent of GDP). - Remittances were critical to household income and consumption during the COVID-19 pandemic (Doan and Petrou 2022). - Correspondent banking relations (CBRs): - Ongoing losses of CBRs threaten PICs’ access to international finance, including remittances. - CBRs in PICs have declined significantly more than in most other regions and continue to fall, leading to concentration of remaining CBRs, increased remittance costs, and lower transaction speed. - Figure 4 panels: - Number of active correspondents (Index 2011=100) tracked annually 2011–2020. - Inward remittances (Percent of GDP) by country: Solomon Islands; Nauru; Fiji; Vanuatu; Micronesia; Tonga; Kiribati; Samoa. - Sources: Bank for International Settlements; IMF, World Economic Outlook database; IMF staff calculations; and IMF staff estimates. ### Digital Money and Crypto Asset Developments in PICs (Notable Examples) - Marshall Islands: - Passed legislation in early 2018 for adopting a private crypto asset (SOV) as the second legal tender; implementation on hold due to substantial concerns over macroeconomic, financial stability, and financial integrity risks. - Conducting a feasibility study jointly with a European firm, Criteo SA, on developing a national digital payment system using a US dollar–backed stablecoin. - Became the first country in the world to formally recognize decentralized autonomous organizations. - Fiji: - Reported as having the fastest adoption of crypto assets in the world (according to Chainalysis statistics and Jahan and others, 2022). - Vanuatu: - Amended its Financial Dealers Licensing Act in July 2021, reversing a previous ban on crypto assets and legalizing a broad set of crypto asset activities. - Palau: - Exploring plans to launch a sovereign stablecoin under a partnership with US-based crypto company Ripple. - Feasibility studies on CBDCs: - Fintech firms Soramitsu (sponsored by the Japanese government) and R3 conducting feasibility studies on introducing CBDCs in Fiji, Solomon Islands, Tonga, and Vanuatu. - Footnote context: Banks’ decisions to withdraw CBRs are driven by cost-benefit analysis, reevaluation of business models amid evolving regulatory and enforcement landscapes (prudential requirements, AML/CFT, and tax transparency) (Erbenová and others 2016). ### Potential Benefits of Digital Money for PICs (Section 3.A) - Broad potential benefits listed: - Reduce transaction costs and increase efficiency (including offsetting remoteness). - Improve government support delivery and reduce leakages. - Broaden access to financial services, especially for underserved populations. - Facilitate international payments and remittances. - Evidence from scenario analysis on digital technology / internet access: - Scenario assumption: digital technology access in PICs rises from current levels to a level equivalent to the top tier of the upper-middle-income country group (such as Malaysia and other East Asian peers). - Results (averages for PICs) when internet access improves: - Deposit accounts with commercial banks per 1,000 adults increase from 1,021 to 1,700. - Loan accounts with commercial banks per 1,000 adults increase from 114 to 165. - Among PICs, Micronesia and Papua New Guinea identified as top gainers from improved internet access. - Similar results found for access to mobile phones (not displayed in figure). - World average deposit accounts reference: 427 (in figure context). - Government support and inequality reduction scenario: - Scenario analysis assumption: government support of about 10 percent of national income distributed through digital money targeting the poorest 20 percent of the population, including those previously unbanked. - Finding: digital money would significantly reduce income inequality by more than half of the last observed level for a number of PICs (Figure 6). - Scenario definitions used in Figure 6: - Scenario 1 – Baseline status quo. - Scenario 2 – Fiscal support of 10 percent of national income distributed to banked population of the bottom 20 of income distribution. - Scenario 3 – Fiscal support of 10 percent of national income distributed to banked and unbanked population of the bottom 20 of income distribution. - Figure 6 metric: Income quintile ratios (Ratio of Top 20 to Bottom 20 Income) for Fiji, Vanuatu, Tonga, Samoa under different scenarios. - Remittance-cost findings (Figure 7 and narrative): - Remittance costs are significantly higher in PICs than in Caribbean and Central American countries (Stuart and others 2019). - Average costs from some corridors range from 5 percent to 11 percent of the transaction value for available country data (Fiji, Samoa, Tonga, Vanuatu), with Fiji having the lowest costs among these four countries. - Costs vary by channel, ranging from less than 1 percent to 20 percent. - Providers with lowest costs in some corridors: Xendpay (available in Fiji) and KlickEx (available in Samoa and Tonga). - Providers often charging higher prices: Western Union and Westpac (though Westpac charges the least in transferring money from New Zealand to Vanuatu). - Nonbank transfer channels have gained substantial shares: in Fiji, mobile operators’ remittance flows rose from nearly zero in 2015 to around 20 percent in Q1 2021; in Samoa, share via nonbanks increased to 90 percent in Q1 2021 from around 80 percent in 2019. - Potential for CBDCs: - CBDCs could enable cheaper, faster, more transparent, and more accessible cross-border payments if counterpart countries adopt interoperable infrastructures; CBDCs could shorten cross-border transaction chains and stimulate competition and transparency. - Caveat: many digital money applications may increase risks of loss of CBRs and many fintech solutions still rely to some degree on existing banking infrastructure. ### Potential Risks of Digital Money for PICs (Section 3.B) - Macroeconomic risks: - Introducing stablecoins and crypto assets as currencies could increase macroeconomic risks if not adequately regulated. - Half of the PICs do not have a national currency and rely instead on Australian or US dollars; populations in some PICs already use crypto assets. - Crypto assets and some stablecoins are poor substitutes for means of payment and carry additional macroeconomic risks (risks to effectiveness of monetary policy, fiscal risks, risks to financial stability, financial integrity risks). - Introducing stablecoins and crypto assets without adequate regulation and governance may compromise PICs’ capability to monitor and manage financial flows, affecting capital flows and illicit financial flows. - Banking disintermediation: - PIC banking sectors are very shallow (five PICs rely on one or two commercial banks only). - Introducing digital money with inappropriate designs or a temporary operational issue at one bank may cause deposit loss from private banks, pressure on bank profits, and restricted credit supply. - Reduced demand for banking services could reduce attractiveness of banks to operate in these small markets. - Operational and capacity constraints: - Lack of resources and capacity, and absence of monetary authorities in some PICs, makes digital money systems more prone to operational risks, particularly cyber risks that require continuous monitoring and incident response (for example, a 24/7 security operations center, behavioral monitoring). - Monitoring and incident management capabilities are necessary for digital resilience and should ideally be in place before issuing digital money. - Sovereign stablecoins issued by PICs with no central bank may lack appropriate oversight or be overseen by institutions unfit for the task (for example, a ministry of finance or a banking association). - Faster-than-expected adoption could quickly create a systemically important digital money system; without adequate oversight and resources, operational disruption could have severe financial stability impacts. - Specific risks to type, operational, and organizational model: - Risks to financial integrity: - Asia/Pacific Group on Money Laundering assessments show most PICs have significant shortcomings in AML/CFT regimes (framework and implementation). - Capacity constraints impair AML/CFT supervision and mitigation; AML/CFT weaknesses have been a source of CBR fragility among PICs. - Law enforcement in PICs may lack capacity to investigate and prosecute criminal cases involving new technologies. - Governance risk: - Introduction of digital money requires effective governance arrangements; unclear roles, responsibilities, and contractual arrangements with technology service providers could lead to undetected design faults and operational vulnerabilities. - Legal and regulatory risk: - Most PICs lack adequate legal frameworks on the status, issuance, and use/circulation of publicly issued digital money or state-/government-backed stablecoins (for example, no power to issue, or laws unclear whether money issued in digital form is legal tender). - For privately issued digital money, laws and regulations may be absent or unclear on how they apply to new forms of digital money, payment systems, and PSPs; lack of clarity on regulatory oversight could leave risks unmonitored. *Source: rdmea - 1. Poverty Rate (rdmea - 1. Poverty Rate), IMF departmental paper excerpts.* ### introduction of new forms of currently unregulated digital money should be guided in setting relevant ### introduction of new forms of currently unregulated digital money should be guided in setting relevant regulatory requirements by international standards ### Technology and operational risks - Technology risk: - Excessive reliance on technology vendors and an unstructured approach to project management can lead to poorly informed design, issuance, and redemption decisions for digital money. - Missing steps in the project lifecycle (for example, adequate testing and stress testing of plausible scenarios) for either lack of or desire to minimize resources and cost, or excessive trust in the technology vendor’s prior successes, could lead to risk-prone solutions and vendor lock-in. - Inadequate governance and internal controls or resource capacity to effectively operate a digital money system, internally or vendor delivered (for example, a stablecoin designed by a private company), could result in service outages and breaches, erosion of consumer confidence and trust, low adoption rates, and ultimately financial stability risks. - Operational and digital resilience requirements: - End-to-end operational and digital resilience is necessary for sustained adoption, including: safe and stable network connectivity with adequate bandwidth; reliability and availability of cloud-based infrastructure; and a sufficiently scalable digital environment to accommodate unexpected or periodic spikes in transaction volumes. - Basic infrastructure (electricity, internet, mobile network coverage, smartphone penetration) in several PICs is insufficient to support sustained, efficient, and secure use of digital money; low capacity and limited resources for outsourcing response to operational/cyber disruptions could lead to prolonged service outages and financial stability implications. ### Adoption and consumer-protection risks - Adoption risk: - Lack of digital/financial literacy among the population in some PICs may lead to unintended adoption levels (too high or insufficient) with negative consequences. - High reliance on tourism in PICs means a digital money solution inaccessible to tourists would have limited adoption and low profitability (particularly in PICs with less than 20,000 people). - Service outages of new digital money systems could lead to loss of confidence in a digital payment instrument, impacting adoption. - Risks to consumer protection: - New forms of digital money may be prone to payment fraud or lack transparency related to use, fees, and stability. - It is important to set risk-proportionate consumer protection requirements for digital money payment instruments and related transactions. - Some PICs may not have strong consumer protection authorities or a consumer protection explicit mandate in the statute of their authorities. ### Decision-making framework for Pacific Island Countries (PICs) - Framework overview: - The framework addresses domestic needs, cross-border needs, or both, and assesses feasibility by considering economic characteristics, capacities, and the nature of payments and financial sectors. - Key considerations: common challenges (see “Context”), economic characteristics relevant for sustainable introduction (Table 3), and whether PICs transact with each other and/or other important partners. - Domestic perspective: - Investment and cost recovery in digital infrastructure and services depend on scale: volumes (correlated to population) and average transaction values (correlated to GDP per capita). - Countries with very low populations (like Nauru, Palau, and Tuvalu) or very low GDP per capita (like Kiribati, Papua New Guinea, and Solomon Islands) might face challenges introducing new forms of digital money with a sustainable cost recovery model. - National currency and CBDC feasibility: - Half of the PICs do not have a national currency and hence cannot issue a CBDC. - Among the remaining half, only a few (Fiji, Solomon Islands, Vanuatu) are exploring CBDC feasibility, though issuance in the short to medium term is unlikely. - For PICs considering CBDC, the IMF’s CBDC virtual handbook can help guide exploration and decisions. - Banking/PSP market maturity: - A two-tier CBDC model may be best for countries with a national currency and a mature banking and PSP sector with ideally more than two to three retail banks and PSPs (to avoid a monopolistic end-user provision of CBDC), such as Fiji, Papua New Guinea, Solomon Islands, and Vanuatu. - A foreign currency–based stablecoin is potentially the most realistic alternative for PICs with no national currencies, few retail banks and PSPs, and low prospects for more such entities entering the market. ### Cross-border perspective and trade patterns - Trade connectivity implications: - Some PICs have very large numbers of trading partners (for example, Fiji and Papua New Guinea traded with 137 and 115 countries in 2021, respectively), while some have only a few (for example, Nauru and Tuvalu traded with 40 and 36 countries, respectively, in 2021). - PICs generally transact very little with each other; Fiji is a major re-exporter and among the top 10 trading partners for six PICs and has the most developed financial sector among PICs. - Micronesia, Nauru, and Palau are less interconnected and have fewer trading relationships with other PICs. Marshall Islands is a net importer and relies relatively less on tourism. - Top five export/import partner shares (Percent of total): - Exports: China 17%; Korea 18%; Australia 16%; Rest of the world 55%. - Imports: China 19%; Singapore 17%; Japan 12%; Rest of the world 46%. ### Regional approaches and options for digital money exploration - A regional approach should accommodate heterogeneity across PICs (national currency presence, maturity of domestic payment systems). - Options to explore jointly: - A. Interlinking traditional domestic payment systems (for example, Thailand and Singapore): - Relevant for PICs with payment systems such as real-time gross settlement or automated clearing house (for example, Fiji, Papua New Guinea, Tonga; developing in Samoa, Solomon Islands, Vanuatu). - Should be accompanied by efforts to improve e-money availability and safety. - Leverages G20 cross-border roadmap Building Block 13 (interlinking of payment systems). - B. Interlinking CBDCs: - Relevant for PICs in a better position to eventually issue CBDC (for example, those with a national currency), but only once CBDC is in place. - Should account for main trading partners adopting CBDC and leverage the roadmap’s Building Block 19 (factoring an international dimension into CBDC design). - C. Developing multilateral payment platforms in the region or joining existing/upcoming platforms: - i. Traditional centralized cross-border and multi-currency payment system (for example, Buna). - Builds on roadmap work on Building Block 17 (multilateral platforms). - ii. “Pooled” stablecoin (private or public sector issued): - Implies multiregional regulation/oversight; may be suitable for PICs with no national currencies; currently being explored by some PICs with private technology companies. - iii. A digital platform that plugs in any type of digital money (for example, project mBridge, X-C, UN Capital Development Fund’s global internetwork for remittances): - Could accommodate e-money, stablecoins, CBDCs; hold digital monies in escrow and issue a token for settlement; perform foreign exchange conversion and convert payments across rails such as DLT networks. - Trade-offs and implementation notes: - A multifunctional regional platform (option C[iii]) is promising for enhancing cross-border payments but is demanding due to integration across incompatible systems. - Less demanding options may be necessary for PICs facing urgent issues (for example, decreasing CBRs) that require swift implementation. - Private sector private cross-border solutions may emerge; such initiatives must be subject to robust regulation and supervision by the authorities. - Precise recommendations require further, country-specific technical analysis and assistance. ### Requirements for adoption and enabling elements - Adoption builds on digital technology, business models, use cases, and legal and regulatory compliance. - Safeguarding financial integrity is increasingly challenging due to characteristics of digital money (speed and ease of moving funds; mechanisms to obfuscate user and transaction data) that render supervisory and law enforcement action more difficult. - Effective implementation is contingent upon availability of basic infrastructure, digital identification, and adequate levels of financial and digital literacy. *IMF DEPARTMENTAL PAPERS • Rise of Digital Money* ### Box 3. Digital Infrastructure Requirements for Digital Money ### Box 3. Digital Infrastructure Requirements for Digital Money ### Systemic resilience and operational continuity - Digital money solutions comprise multiple connected parties and interfaces which blur traditional boundaries of oversight, surveillance, and assurance and each represents a potential point of failure or an entry point for a cyberattack. - Operational disruptions caused by a failure of an end point or a core infrastructural component, or a cyber event are likely and should be anticipated, particularly in environments where digital readiness and risk awareness are suboptimal. - Emphasize both prevention (appropriate policies and controls) and timely recovery to minimize consumer impact. - Governance should include documented and tested disaster recovery, incident response, and business continuity arrangements, individually and collectively, for core systems, intermediaries, and third-party solution providers. - Digital money ecosystems should be designed to be resilient through a combination of technology, people, and processes with effective governance and oversight. - Core technology components (hardware, software, storage devices, network switches, and end points) should be: - fit for purpose; - have built-in redundancies; - be up to date in terms of upgrades and patches; - be fully supported by vendors; and - be appropriately managed for any vulnerabilities. ### Vendor reliance and internal capacity - Reliance on technology vendors should be balanced with internal capacity and oversight. - Vendor contracts should be structured to avoid lock-ins and include clearly defined operational parameters and exit clauses. ### People, skills, and user risk awareness - The people element in resilience should cover: - Skilled and adequate operational resources to manage, maintain, and protect systems from failure or cyberattacks, and spot anomalies in behaviors, data transmission, and exfiltration (insider threats or external events). - Skilled and adequate resources to manage the risks of digital systems, define controls, monitor for any potential failure, and report the information internally and for compliance purposes. - Risk-aware users: end users should be trained to secure their devices, respond appropriately to threats, spot exploitation attempts, and know how to report them. ### Processes, assurance, and testing - Processes should be reviewed frequently for effectiveness and updated to accommodate changes in technology, evolving operational risks and cyber threats (including access management, change management, patch management, and vulnerability management). - Assurance teams should be sufficiently skilled to identify issues, anomalies, and emerging risks and escalate for remediation on a timely basis. - Independent reviews and stress tests should be carried out periodically to assess effectiveness of control mechanisms. ### Digital identities and national strategies (regional status) - Digital identities should ideally be in place for secure access to digital money systems and authorized transmission of payments, but these are only present in Palau and Papua New Guinea. Although these two countries have implemented digital identifiers, the extent of adoption and usability is yet to be confirmed. - Only four countries (Fiji, Samoa, Tonga, Vanuatu) have national digital strategies demonstrating commitment to digitization from the authorities. - Given low rates of financial inclusion, it is likely there is insufficient digital and financial literacy and therefore inadequate risk awareness, creating vulnerabilities in the digital money ecosystem and potentially compromising data and transaction integrity. ### Business models - Digital money service providers should be motivated to develop business models that generate sustained revenue and manage costs. - Providers can reach sustainability by collecting fees and cross-subsidy as payment revenues, while managing fixed and variable costs.20 - Data-driven business models could be considered in promoting digital money adoption, depending on data privacy policies in different jurisdictions. - If providers do not have sustainable business models, adoption will be too limited to allow policymakers to achieve their policy objectives. ### Use cases and adoption - Digital money must be widely used in various use cases.21 - Relevant use cases include transportation, food delivery, streaming services, e-commerce, social networks, online media (video streaming, music, gaming), and digital finance. - Adoption is driven by creating and expanding use cases that provide value for merchants and consumers; adoption is less about payment than about use cases. - Various business cases promote adoption by increasing economies of scale and economies of scope. - Because of high fixed costs, payment networks often need to sign up a minimum number of users (“critical mass”) for the total value of the network to exceed its operating costs (CPSS 2012).21 ### Legal and regulatory compliance — core points - Adoption should be supported by a legal framework that provides certainty on the legal status of digital money and its implications, and adequately safeguards parties involved from risks. - To issue a token based CBDC, the central bank must have a clear mandate to issue currency in digital form because CBDC is a liability of the central bank; most central banks are authorized to exercise and perform only the functions and powers established in their applicable laws. - A CBDC based on a current account contractual relationship between the central bank and the CBDC holder entails other legal implications (Box 4). - For issuance of a state- or government-backed stablecoin, the government would require a legal mandate or authority for such an issuance; government-backed stablecoins may give rise to additional risks. - The legal framework on holding and transfer of CBDC or government-backed stablecoins must be clear to reflect a direct claim on the central bank or government, respectively. - For government-backed stablecoins, law needs to provide that the stablecoin is backed or guaranteed by the government and be clear about redemption by the public and specific redemption modalities; effective regulation of custodians holding the reserve assets is crucial. - Legal frameworks for indirect or two-tier holding structures must clarify ownership structure of digital money held on wallets offered by third parties, determining holders’ rights in event of intermediary insolvency. - Countries should consider whether and how issuers and PSPs participating in operational arrangements of privately issued digital money will be regulated and supervised. - The Financial Stability Board called for stablecoins to be held to high regulatory and transparency standards while maintaining “at all times the reserves that preserve stability of value and meet relevant international standards” (FSB press release 24/2022, page 2). - With the exception of the FATF Standards on AML/CFT, there are currently no international standards in place for the regulation and supervision of all types of digital money.22 - Several countries have set comprehensive legal frameworks, for instance requiring e-money issuers to obtain a license and comply with prudential standards (Dobler and others 2021). ### Box 4 — Additional legal considerations for digital money (highlights) - CBDC and government-backed stablecoins: legal relationship between central bank and holder is relevant. If design involves a current account contractual relationship, the central bank must be authorized to open current accounts to CBDC holders; token-based CBDC does not require opening deposit accounts in central bank books but central bank should have powers to acquire, distribute, withdraw, and destroy such CBDC. - Legal tender status: no precedent on necessity of legal tender status for wide acceptance of digital money. Consideration of legal tender status should weigh ease of access for the population. - Safekeeping of funds in e-money schemes: legal/regulatory frameworks should require e-money issuers to safeguard users’ funds, keep a pool of liquid funds at least equivalent to aggregate user balances, and segregate users’ funds from issuer assets and liabilities. Mechanisms include trusts, fiduciary contracts, escrow accounts, or legal provisions deeming customer funds separate from issuer assets (Dobler and others 2021). ### Financial integrity and AML/CFT risks - Virtual assets, including stablecoins, have potential to be misused for ML and TF due to potential for anonymity, global reach, and ease of layering of illicit funds; stablecoins present heightened risks given potential wide market adoption (FATF 2020). - A stablecoin issued as legal tender will have the government’s “endorsement” and may be even more accessible and widely used. - CBDCs may also bear ML/TF risks depending on nature (retail versus wholesale, domestic versus cross-border), design choices (e.g., tiered wallets to preserve privacy), and ecosystem (service providers, intermediaries, user base). - Key considerations: - CBDC ecosystem and scope: number and jurisdiction of users and intermediaries impacts ML/TF risks and regulatory/supervisory implications. - Level of intermediation and allocation of AML/CFT responsibilities: in a one-tier model central bank would have direct AML/CFT obligations; in a two-tier model AML/CFT obligations remain with intermediaries. Ensuring all relevant actors are subject to AML/CFT regime and supervised is key.22 - User identification and due diligence: critical to identify the customer and source of funds; due diligence challenges may differ between account-based or token-based arrangements and are magnified in cross-border contexts. - Monitoring AML/CFT compliance: new service providers may require adaptation of AML/CFT laws, supervisory models, and structures; coordination with other AML/CFT agencies and foreign counterparts is important (see BIS 2022). ### Box 5 — Financial integrity considerations for government-backed stablecoins (highlights) - Pacific island countries should understand ML/TF risks of a proposed government-backed stablecoin prior to launch; FATF Standards require countries to assess ML/TF risks associated with new products and technologies such as stablecoins.1 - Countries should understand ML/TF risks arising from design features and intended use (level of anonymity, cross-border functionality) and have a mitigation strategy updated during preparatory stages and after issuance based on collected data and analysis. - Various entities in a stablecoin arrangement may have AML/CFT obligations as financial institutions or virtual asset service providers.2 - FATF Standards treat financial institutions and virtual asset service providers as “gatekeepers” obligated to implement AML/CFT controls (customer due diligence, monitoring, reporting suspicious transactions, record-keeping) and to assess ML/TF risks of their business activities, including new products, technologies, and delivery mechanisms. - Pacific island countries considering issuing a government-backed stablecoin should: - assess adequacy of legal framework and capacity of AML/CFT-competent authorities; - ensure legal framework provides structure for appropriate mitigation of ML/TF risks; - ensure competent AML/CFT authorities have expertise to supervise regulated entities, conduct financial analysis of suspicious transactions involving stablecoins, and investigate/prosecute/sanction criminal activities involving stablecoins; - consider training and technological tools to develop skills and support these efforts. - Footnotes and definitions referenced in Box 5: FATF 2023 Recommendation 15 and Interpretive Note; FATF 2020 ¶ 48; FATF glossary definitions of financial institutions and virtual asset service providers.3 ### Regional capacity and risks - PICs may not be well situated to address ML/TF risks arising from digital money: historically struggled to mitigate ML/TF risks effectively due to resource constraints, limited law enforcement and supervisory capacity. - Introducing new risks may strain AML/CFT systems, exacerbate deficiencies, weaken domestic AML/CFT regimes, intensify CBR pressures, and lead to tightening of access to global markets. - Inconsistent application of AML/CFT controls across the region may lead to regulatory arbitrage. - AML/CFT regimes will need to be adapted and strengthened; significant legal and regulatory changes and institutional capacity building may be required to ensure all relevant actors have AML/CFT obligations and are subject to risk-based supervision and sanctions. - Law enforcement agencies need to be empowered and equipped with resources and expertise to investigate and prosecute cases involving digital money. ### Design considerations for Pacific Island Countries (C. Design Considerations for Pacific Island Countries) - To deal with poor network connectivity, offline functionality could be part of the design of digital money. In the context of a CBDC, offline functionality is available and is being considered by many advanced economies and low-income countries. - To establish a sustainable business model, design could be targeted to enable data collection (such as transaction data, at appropriate levels of anonymization). - To promote financial literacy, onboarding design features may help (for example, simplified customer due diligence requirements where there are demonstrated low ML/TF risks), in addition to education and training. Risk awareness campaigns should precede any launch of digital money and continue periodically. - To ensure interoperability, fragmented solutions offered by a variety of banks and PSPs should be upgraded to use international standards and common application programming interfaces, while new ones could be designed based on such standards. - To enhance cross-border payments, programmability and smart contracts could be used to facilitate safe and targeted disbursement of aid to these countries. *IMF DEPARTMENTAL PAPERS • Rise of Digital Money — Box 3. Digital Infrastructure Requirements for Digital Money* ### 5. Conclusion and Next Steps ### 5. Conclusion and Next Steps ### Challenges and potential of digital money for PICs - Major constraints: remoteness, geographic dispersion, lack of access to basic financial services, reduced access to international finance from declining correspondent banking relationships (CBRs), and heavy reliance on remittances. - Potential benefits of digital money (digital currency and/or efficient payment systems): - Circumvent structural barriers (overcome restrictions of physical presence). - Significantly lower transaction costs. - Better targeting of aid to the most vulnerable. - CBDCs, if appropriately designed and implemented, could create a clean slate, help alleviate CBR pressures, and promote smoother cross-border payments. ### Risks and financial integrity concerns - Widespread and ill-prepared introduction of digital money may cause financial, technological, and legal risks: - Unregulated and unsupervised crypto assets and stablecoins could introduce a backdoor form of dollarization and complicate financial flow monitoring and management (including capital and illicit flows). - Cash-dominant PICs with customer deposits concentrated in very few banks or even one bank face risk of “digital runs” from private-sector digital money, threatening bank profits and credit supply. - Low capacity and IT preparedness increase vulnerability to prolonged operational technology disruptions and financial stability risks. - Governance, legal and regulatory, technology, and adoption risks. - AML/CFT and ML/TF implications: - AML/CFT regimes need adaptation and strengthened implementation to regulate digital money and mitigate ML/TF risks and to avoid further pressure on existing CBRs. - CBDCs and stablecoins adopted as legal tender may be particularly attractive to illicit actors due to potential for significant reach and widespread adoption. - Assessment of ML/TF risks may require significant legal and regulatory changes and resourcing for AML/CFT supervisors, financial intelligence units, and law enforcement. ### Preconditions, design features, and policy measures - Basic elements required for introduction and adoption: - Reliable electricity, internet, and cellular network coverage. - Adoption of emerging digital technologies (for example, cloud computing). - Business models for digital money service providers that generate sustained revenue and cover costs. - Wide usage across various use cases, including tourism-related transactions. - Clear legal framework on legal status of digital money and implications, with safeguards for agents. - Appropriate regulatory framework for digital money service providers to ensure compliance. - Design features to consider for PICs: - Offline functionality to address poor network connectivity. - Enabling information sharing to foster innovative business models and cross-selling (example cited: M-Pesa in Kenya). - Programmability of a CBDC to facilitate safe and targeted disbursement of aid. - Financial literacy education and risk awareness campaigns should precede any launch and continue periodically. ### Recommended approach and alternatives - Cautious step-by-step exploration to harness benefits while guarding against risks; individual countries will face differing circumstances and capacity constraints. - Policy stances on particular types of digital money: - Unbacked crypto assets, associated with many risks, should generally not be granted official currency or legal tender status. - A foreign currency–based stablecoin is a potential alternative for PICs with no national currencies but requires strong regulation and supervision and should be approached cautiously. - Countries with a national currency may eventually introduce a CBDC, though this is unlikely to be appropriate in the short to medium term. - Regional solution: - Best medium- to long-term solution may be PICs joining a “multifunctional” regional platform developed by trading partners, allowing participation by PICs with different types of money and payment systems and overcoming capacity and scalability constraints. - Regional approaches support participation in digital platforms and regional networks, collaboration, and knowledge sharing. - Digital money should be part of a national or regional digitalization and financial inclusion strategy. - Evaluate new technologies with development partners before implementation to ensure sustainable adoption. - Effective collaboration with international organizations, such as the IMF, could help knowledge exchange and experience sharing. ### Annex 1 — Implications on financial inclusion (key empirical findings) - Panel regression analysis (2004–2020; IMF Financial Access Survey and World Bank WDI; simple OLS and fixed effects with robust standard errors) finds a positive correlation between access to digital/mobile technology and financial inclusion. - For PICs, estimated effects: - "A 1 percentage point increase in internet access is associated with about a 10- to 14-unit increase in deposit accounts per 1,000 adults and about a 1-unit increase in loan accounts per 1,000 adults, respectively." - Internet access increase is also associated with an expansion of bank branches in PICs (a complementary effect on traditional banking services). - Mobile phone access shows a similar but relatively milder estimated impact than internet penetration. - Scenario analysis (raising PICs’ digital and mobile access to top-runner upper-middle-income levels such as Malaysia and East Asian peers) projects average increases for PICs in: - Deposit accounts: from 1,021 to around 1,700 per 1,000 adults. - Loan accounts: from 114 to around 165 per 1,000 adults. - Micronesia and Papua New Guinea identified as among top gainers from improved digital access. ### Annex 2 — Implications for government service delivery and inequality (scenario analysis) - Scenario setup: - Scenario 1: baseline with actual income distribution and no fiscal support. - Scenario 2: fiscal support of 10 percent of national income distributed through digital money to the poorest 20 percent of the population who have access to formal financial services or a bank account. - Scenario 3: fiscal support of 10 percent of national income distributed through digital money to all individuals—both banked and unbanked—in the poorest 20 percent. - Results summary: - Scenario 2: reduction in inequality ranges from 25 percent in Vanuatu to 37 percent in Fiji, compared to the status quo (Scenario 1). - Scenario 3: inequality is significantly reduced by more than half in all four PICs analyzed (Fiji, Samoa, Tonga, Vanuatu). - Annex Table 2.1 entries (reported values by country and scenario): - Scenario 2: Fiji 237; Tonga 224; Vanuatu 225; Samoa 233. - Scenario 3: Fiji 254; Tonga 260; Vanuatu 257; Samoa 260. ### Annex 3 — Fact-finding survey highlights (Fiji) - Currency and reserves: - Fiji’s national currency is the Fiji dollar. - Exchange rate regime: conventional peg versus a currency composite (basket: US dollars, Australian dollars, New Zealand dollars, euros, and Japanese yen). - "A total of 4.89 percent of total deposits was in foreign currency as of June 2022." - Payment infrastructure and services: - Reserve Bank of Fiji (RBF) working on National Payment System reform to implement an ATS comprising RTGS, an automated clearinghouse and IFT component, and a central securities depository system; upgrade of current FijiClear (RTGS) planned. - No domestic privately operated payment infrastructure. - Bank, debit, and credit cards (Visa and Mastercard) are issued in Fiji. - Six licensed banks: ANZ, Bank of South Pacific, Westpac Banking Corporation, HFC Bank, BRED Bank, Bank of Baroda. - "10.7 bank branches/offices, 53 automated teller machines, and 790 point of sale terminals per 100,000 people." - Two unlicensed nonbank payment service providers: Vodafone Fiji’s MPaisa and Digicel’s MyCash (offer e-money/e-wallets, merchant acquiring, card issuance); nonbank providers expected to be indirect participants in new National Payment System. - Only commercial banks are entitled to exchange settlement accounts with the RBF; nonbanks may have accounts for dematerialized securities with the RBF. - Most used retail payment and peer-to-peer methods: cash, bank transfer, debit cards, internet banking, and mobile money. - Mobile money: "7.9 million transactions in 2021 compared to 4.9 million through direct credit transfers over internet banking in the same period." - Participation in international e-money schemes relies on local customers having credit card scheme co-badged cards (Visa, MasterCard). Multinational e-money schemes do not have legal presence in the country (examples cited: PayPal, Apple Wallet), though locals can link credit cards to access services on international platforms. - Remittance providers include Western Union and MoneyGram; other providers integrate remittances into local e-wallet platforms. Examples: Ria Money Transfers, Rocket Remit, World Remit, thunes, wise, Orbitremit, KlickEx, Remitly, Digicel International. - E-money is relatively cost-effective compared to bank accounts. - Digital identification and regulation: - "There is no digital identification system in place. A total of 29 percent of population lacks a birth certificate." - RBF is exploring central bank digital currency. - "There are no unbacked crypto assets used nor foreign or domestic stable coins used in Fiji. Cryptoasset activities are not regulated or banned." - Legal framework: Fiji has a currency law covering issuance of currency and legal tender; National Payment System Act 2021 has not yet commenced. - Uncertainty whether current legal framework allows issuing a central bank digital currency; crypto asset service providers, exchanges, or activities are not regulated or banned. *IMF Departmental Papers — Rise of Digital Money, Section 5 and Annexes (conclusion, scenario analyses, and Fiji fact-finding survey).* ### Annex Table 3.1. Fiji (continued) ### Annex Table 3.1. Fiji (continued) ### Kiribati - Currency: Kiribati does not have a central bank nor a national currency. Australian dollars are in use in the country. - Payment Infrastructure: There is no domestic central bank operated payment infrastructure, but the payment system is facilitated via CBRs with ANZ Bank. - Payment Services: There is one licensed bank in Kiribati and there are 10 automated teller machines per 100,000 people. - Digital Identification: There is no digital identification system in place. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: There are no unbacked crypto assets used in Kiribati. - Legal: Kiribati does not have a currency law. A supervisory and regulatory framework on payment system and payment services is currently under formulation with the help of IMF technical assistance. ### Marshall Islands - Currency: Marshall Islands does not have a central bank. US dollars are in use in this country. - Payment Infrastructure: - Interbank clearing and settlement is not currently regulated by the banking commission and is highly check-based. - Both the Bank of Guam and the Bank of the Marshall Islands voluntarily cooperate to facilitate a manual check clearing process where checks are cleared daily. - The payment system is facilitated through the US payment system, via correspondent banking relationships (CBRs) with US banks. - Debit cards and credit cards (Visa/Mastercard) are issued in the country. - Payment Services: - There are two licensed banks (Bank of Marshall Islands and Bank of Guam, a branch of a US FDIC insured bank), nine bank branches/offices, 10 automated teller machines, and 229 point of sale terminals per 100,000 people. - Banks offer cash services, card issuance, card transactions, and checks. - There are two remittance providers: Western Union and MoneyGram. - The most used retail payment and peer-to-peer money transfer method is bank transfer. - The Bank of Marshall Islands is facing pressures related to CBRs, and it has only one US dollar CBR. - Costs are high for payments and remittances. - Digital Identification: There is no digital identification system in place. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: - There are limited unbacked crypto assets used for investment purpose. - The government passed a legislation to adopt a private crypto asset (SOV) as the second legal tender in 2018, but the implementation is put on hold. - There is a memorandum signed with a private firm Criteo S.A. to set up a National Digital Payment System based on a backed US dollar coin, but progress remains limited so far. - It is the first country to approve decentralized autonomous organizations. MIDAO is the domestic registrar for decentralized autonomous organizations. - Legal: Marshall Islands is in the process to establish a monetary authority and has requested technical assistance from the IMF on the legal, policy, and operational framework. ### Micronesia - Currency: Micronesia does not have a central bank nor national currency. US dollars are in use in the country. - Payment Infrastructure: There is no domestic central bank operated payment infrastructure. The payment system is done through the US payment system under the Compact Agreement. - Payment Services: - There are two licensed banks in Micronesia (Bank of Micronesia and Bank of Guam). One is a domestic bank and the other is a US bank branch, both of which are US FDIC insured. - There are eight bank branches/offices and 11 automated teller machines per 100,000 people. - Banks offer cash services, card issuance, card transactions, checks, and wire transfers. - There are several nonbank payment service providers in the country, such as MoneyGram and Western Union, but they are not regulated or supervised by the Micronesia Banking Board. - Remittance can be transferred through both banks and nonbank payment service providers. - Digital Identification: There is no digital identification system in place. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: There are no unbacked crypto assets and no foreign or domestic stablecoins used in the country. - Legal: - Micronesia does not have a currency law. - Micronesia has the following: Consumer Protection Act, Bankruptcy ACT, AML/CFT Act, Usury Act and the Bank Act. - Since all the banks are US FDIC insured, they must also comply with the US banking and related laws and regulations. ### Nauru - Currency: Nauru does not have a central bank nor a national currency. Australian dollars are in use in the country. - Payment Infrastructure: There is no domestic central bank operated payment infrastructure. - Payment Services: There is one bank licensed in the country. - Digital Identification: There is no digital identification system in place. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: There are no unbacked crypto assets used in the country. - Legal: Nauru does not have a currency law. ### Palau - Currency: Palau does not have a central bank nor a national currency. US dollars are in use in the country. - Payment Infrastructure: - There is no domestic central bank operated payment infrastructure. The domestic private operated payment infrastructure is based on automated clearinghouses by US banks. - Debit/credit cards are issued by three US banks. - Payment Services: There are five licensed banks and 40 automated teller machines per 100,000 people in the country. - Digital Identification: The digital identification system was rolled out in 2022. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: - There is a plan to issue sovereign stablecoins by late 2022 (based on R3 XRP blockchain). - There are no unbacked crypto assets used in the country. - There is no absolute but implicit ban on crypto assets activities. The Republic of Palau Financial Services Regulation oversees crypto asset activities. - Legal: - Palau does not have a currency law. - There is a recent Digital Residency Law according to which global citizens can claim a Palauan blockchain digital residency backed by a sovereign entity. ### Papua New Guinea - Currency: Papua New Guinea’s national currency is the Papua New Guinean kina. The exchange rate is de jure floating but de facto stabilized. - Payment Infrastructure: The domestic central bank operated payment infrastructures include Kina Automated Transfer Systems (real-time gross settlement), direct credits, check processing, and Papua New Guinea National Switch (card payment and mobile payment). - Payment Services: - There are four banks are licensed in the country (Bank of South Pacific, Westpac, ANZ, Kina Bank). - There are 2.46 bank branches/offices, six automated teller machines, and 145.8 point of sale terminals per 100,000 people in the country. - Banks offer cash services, card issuance, card transactions, and checks. - Digital Identification: - Papua New Guinea has a digital identification system. - A recent trial of a digital access tool allows citizens without identification to participate in the banking sector with savings accounts and loans. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: - The Bank of Papua New Guinea is not exploring central bank digital currency. - There are unbacked crypto assets used in the country. Crypto asset activities are not regulated, and there is no explicit ban on them. - Legal: Papua New Guinea has a currency law, but whether the current legal framework allows issuing a central bank digital currency is uncertain. ### Samoa - Currency: Samoa’s national currency is the Samoan tālā. The exchange rate is based on a conventional peg vis-à-vis a currency composite of currencies of its major trading partners. The share of foreign currency deposit as total deposit is 12.9 percent as of end of 2021. - Payment Infrastructure: - The Central Bank of Samoa is in the process of introducing a digital payment system that includes real-time gross settlement, automated clearinghouse, and central securities depository. - Visa and Mastercard debit card, Visa, Mastercard, Amex, Diners, and JCB credit cards are issued in the country. - Payment Services: - There are four banks licensed in the country (Samoa Commercial Bank, National Bank of Samoa, ANZ, Bank South Pacific). - There are 18.4 bank branches/offices, 59 automated teller machines, and 508.5 point of sale terminals per 100,000 people in the country. - Banks offer cash services, card issuance, card transactions, and checks. - There are 11 money transfer operators for remittances. - The jurisdiction is facing pressures related to correspondent banking relationships, and the number of correspondent banking relationships declined in the last several years. - Digital Identification: There is no digital identification system in place. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: - The Central Bank of Samoa is not exploring central bank digital currency. - There are no unbacked crypto assets and no foreign or domestic stablecoins used in the country. - There is no absolute nor implicit ban on crypto asset activities. - Legal: Samoa has a currency law but whether the current legal framework allows issuing a central bank digital currency is uncertain. ### Solomon Islands - Currency: Solomon Islands’ national currency is the Solomon Islands dollar. The de jure exchange rate arrangement is a conventional peg arrangement, while the de facto is a crawl-like arrangement. Solomon Islands dollar is pegged to an invoice-based weighted basket of currencies consisting of US/Australian/New Zealand dollar, Japanese yen, and British pound. - Payment Infrastructure: - The central bank is in the process of introducing digital payment system that includes real-time gross settlement, automated clearinghouse, and central securities depository. - Debit and debit/credit cards of Visa/Mastercards are issued in the country. - Payment Services: - There are four banks licensed in the country (ANZ, Bank South Pacific, Bred Bank, Pan Oceanic Bank). - There are 2.14 bank branches/offices, eight automated teller machines, and 46.4 point of sale terminals per 100,000 people in the country. - The jurisdiction is facing pressures related to correspondent banking relationships, and the number of correspondent banking relationships declined in the last several years. - A mobile wallet product called EziPei was launched in February 2022. While still at an early stage, it holds promise for citizens to send money, receive money, top up airtime, and pay for electricity and water from anywhere using any smartphone or feature phone, and on any network. - Digital Identification: There is no digital identification system in place. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: - The Central Bank of Solomon Islands is exploring central bank digital currency. - There are unbacked crypto assets used in the country for investment and not regulated by Central Bank of Solomon Islands. - Legal: - Solomon Islands has a currency law. The Central Bank of Solomon Islands Act covers both issuance of currency and legal tender, and regulates the payment systems and payment services. - There is no data protection law in place. ### Tonga - Currency: Tonga’s national currency is the Tongan pa’anga. The exchange rate is de jure pegged within horizontal bands, but de facto other managed. Tonga is predominantly a cash-based economy. - Payment Infrastructure: - Tonga has domestic central bank operated payment infrastructures that include real-time gross settlement, automated clearinghouse, digital check processing, and central securities depository, among others. - Debit/prepaid cards are issued in the country. - Payment Services: - There are four banks licensed in the country (ANZ, MBF Bank, Tonga Development Bank, Bank of South Pacific Tonga). - There are 33 bank branches/offices and 40.5 automated teller machines per 100,000 people in the country. - Banks cash services, card issuance, card transactions, and checks. - The most used retail payment and peer-to-peer money transfer method currently is through bank transfers. - Some financial institutions are licensed for inward and outward remittances. - The jurisdiction is facing pressures related to correspondent banking relationships, and the number of correspondent banking relationships declined in the last several years. - Digital Identification: There is no digital identification system in place. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: - The National Reserve Bank of Tonga is not exploring central bank digital currency. - There are no unbacked crypto assets used in the country. - Legal: - Tonga has a currency law that covers both issuance of currency and legal tender. - Payment systems and payment services are regulated by specific laws. ### Tuvalu - Currency: - Tuvalu’s national currency is the Tuvaluan dollar, but the Australian dollar is de facto in use. - Tuvaluan dollar is pegged one-to-one to the Australian dollar. - Payment Infrastructure: There is no central bank or monetary authority and no domestic central bank–operated payment infrastructures. - Payment Services: - There are two banks (National Bank of Tuvalu, Development Bank of Tuvalu) and one pension fund (active in lending) licensed in the country. The payment service is cash-based. - There is very high need of foreign exchange given the large level of imports and public sector grants received, and foreign exchange service is provided now by National Bank of Tuvalu, which is the only institution in Tuvalu able to conduct international transactions and transmit remittances. - The jurisdiction is facing pressures related to correspondent banking relationships. - Digital Identification: There is no digital identification system in place. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: There are no unbacked crypto assets used in the country and no authorities oversee crypto asset activities. - Legal: - Tuvalu does not have a currency law. - Payment systems and payment services are not regulated. ### Vanuatu - Currency: Vanuatu’s national currency is the Vanuatu vatu. The exchange rate of the vatu is linked to a transaction-weighted (trade and tourism receipts) basket of currencies. A total of 30.8 percent of total deposits was in foreign currency as of the end of 2021. - Payment Infrastructure: - Vanuatu is in the process of introducing a digital payment system that includes real-time gross settlement, automated clearinghouse, and central securities depository. - Debit and credit cards (Visa and Mastercard) are issued in Vanuatu. - Payment Services: - There are five licensed banks in Vanuatu (National Bank of Vanuatu, Wanfuteng Bank, ANZ, Bank of South Pacific, BRED Bank). - There are 21 bank branches/offices and 47.6 automated teller machines per 100,000 people. - Banks offer cash services, card issuance, card transactions, and checks. - There are three licensed nonbank payment service providers in Vanuatu, which provide e-wallets services. - The most used retail payment and peer-to-peer money transfer method is bank transfer. - e-money schemes include Western Union, MoneyGram, Vodafone, Digicel, and Wantok. - Vanuatu is facing pressures related to correspondent banking relationships and has seen a decline in correspondent banking relationships. - Digital Identification: - There is no digital identification system in place. A total of 18 percent of population lacks a birth certificate. - A national information and communication technology policy is currently being reviewed. - Central Bank Digital Currency, Crypto Assets, and Stablecoins: - The Reserve Bank of Vanuatu is exploring central bank digital currency. - There are no unbacked crypto assets used in Vanuatu. - The Reserve Bank of Vanuatu released a public statement in 2017 that crypto currencies are not a recognized form of legal tender in Vanuatu and that the Reserve Bank of Vanuatu does not support its use. - In 2021, the Vanuatu Financial Services Commission amended the Financial Dealers Licensing Act to allow trading in digital assets including crypto assets. - Legal: - Vanuatu has a Bill for Central Bank of Vanuatu Act that covers the role of the central bank and the issuance of currency and legal tender. - It has a Bill for the National Payment System. - Vanuatu has a data protection law in place that addresses data theft and financial fraud. *Source: IMF staff.* --- _Source: https://www.imf.org/-/media/files/publications/dp/2024/english/rdmea.pdf_