IMF Identifies Climate Change, DAOs, and CBDCs as Concerns for Marshall Islands, Calls for Reforms

The Republic of the Marshall Islands (RMI) recently concluded its annual discussions with the International Monetary Fund (IMF), projecting a rebound in gross domestic product (GDP) growth this year. The country aims to recover from the adverse impacts of the COVID-19 pandemic and the contraction of its fishing industry. However, the IMF has identified climate change and the rise of decentralized autonomous organizations (DAOs) as ongoing threats to the nation.

Situated across more than 1,000 islands in the Central Pacific, the RMI faces unique challenges due to its average elevation of only six feet above sea level. With a population of approximately 56,000 and a GDP of $261 million in 2022, the country experienced a 4.5% decline in GDP that year due to the sale of a single fishing boat.

To prepare for the new Compact of Free Association with the United States, which takes effect in 2024, the IMF emphasized the need for fiscal reforms in the RMI. Furthermore, the IMF expressed concerns regarding fintech initiatives, citing potential risks to the country’s financial integrity.

Of particular unease to the IMF were the RMI’s recent legislative measures recognizing DAOs as legal entities and allowing them to incorporate as limited liability companies. The IMF highlighted concerns over regulatory and supervisory capacity, stating:

“The enactment of the DAO Act and the move to start registration of DAOs […] are especially concerning given the capacity constraints and questions regarding the understanding of the authorities to adequately regulate and supervise these initiatives.”

As a recommendation, the IMF advised the RMI to impose a moratorium on DAO registration and prioritize the establishment of a monetary authority. It remains unclear whether any DAOs have been registered in the RMI thus far.

The RMI also faces the potential loss of its last U.S. dollar correspondent account due to concerns related to its fintech and offshore sector regarding Anti-Money Laundering and Counter-Terrorist Financing. The termination of correspondent accounts, known as derisking, can isolate a country from the international economy and is a matter of social justice contention.

In addition, the IMF advised the RMI to repeal its central bank digital currency (CBDC), known as the SOV. Despite the IMF’s general favorability towards CBDCs, it recommended that the RMI step back from its CBDC project, as it deemed the country unprepared. To date, the launch of the SOV has not occurred.

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