Digital Money, Carefully Managed, Can Aid Pacific Island Growth and Equality

IMF Blog, March 25, 2024

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Canonical URL: Digital Money, Carefully Managed, Can Aid Pacific Island Growth and Equality

Publication date: March 25, 2024.
Authors: Bo Li, Anca Paduraru, Yong Sarah Zhou.
Scope: Explores the potential role of digital money (including stablecoins and central bank digital currency, or CBDC) for Pacific island countries; excludes unbacked crypto assets as they "do not meet the definition of money."
Challenge context: Pacific island countries are some of the world’s most remote and dispersed and face constrained financial services and inclusion owing to small size and unique geography. Many are highly dependent on remittance flows and are disproportionately impacted by diminishing correspondent banking relationships.

Digital money and related innovation can offer advantages such as efficiency, accessibility, and security.
Well designed and governed digital money can support policy objectives like financial inclusion and greater cross-border connectivity.
Digital money can empower previously underserved people and groups by providing access to financial services and government support.
Digital money must be attractive to use, including by tourists, who provide a large share of national income for many countries in the region.

Adoption without adequate preparation and safeguards can disrupt economies and financial markets and cause serious financial stability risks in countries lacking capacity.
Digital money could introduce new threats from money laundering and terrorist financing.
Pacific island countries are constrained by scale and resources:
- Digital infrastructure and institutional frameworks—legal, regulatory, and supervisory—tend to be underdeveloped.
- Many countries cannot afford high development costs, such as training, operations, and technology development.
Embracing digital money requires underlying infrastructure that is stable, secure, and accessible. Service providers should be encouraged to develop business models that generate sustained revenue and cover costs.
The legal status of digital money should be clear, including obligations of service providers, user rights, and responsibilities of supervisory and other authorities.

Digital money decisions should depend on monetary and financial conditions, such as:
- The existence or not of a national currency.
- The maturity of domestic payment systems.
- Adequate institutional capacity.
Countries with a national currency may eventually be able to introduce a CBDC at some point in coming years.
Design options linked to industry maturity:
- A two-tier CBDC (whereby the central bank issues but delegates the operation to private intermediaries) may be best for countries with national currency and mature banks and payment providers.
- Foreign currency–based stablecoins could be a realistic alternative for countries without their own currencies, though only with robust regulation and supervision.

Pacific island countries could explore a regional approach to introducing new forms of digital money and payments while managing associated risks, including:
- Connecting traditional domestic payment systems.
- Interlinking CBDCs once in place.
- Establishing or joining multilateral digital payment platforms and regional networks.
- Knowledge sharing with peers, development partners and international organizations like the IMF.

The IMF has provided training and technical assistance in the region for three decades, including through the Pacific Financial Technical Assistance Center.
The IMF has helped by bringing together peers and senior policymakers from other regions to share experiences.

This blog is based on the departmental paper Rise of Digital Money: Implications for Pacific Island Countries.
Research contributions from: Tao Sun, Arvinder Bharath, Stephanie Forte, Kathleen Kao, Yinqiu Lu, Maria Fernanda Chacon Rey, Piyaporn Sodsriwiboon, Chia Yi Tan and Bo Zhao.
For more on the Fund’s work in the region, see commentary by Deputy Managing Director Bo Li and Marshall Mills, who leads the Pacific Islands Division and is mission chief for Fiji.

Source: IMF blog "Digital Money, Carefully Managed, Can Aid Pacific Island Growth and Equality", March 25, 2024.