Marshall Islands tests crypto for universal basic income as cash and banks run short

Access to financial services is changing in the Republic of the Marshall Islands (RMI), as the island nation begins to use digital tools to support its citizens.

Late last month, some Marshallese accepted paper checks under ENRA, the RMI’s universal basic income program, while others saw a token called USDM1 appear in Lomalo, a Stellar-based ‘digital citizen wallet’ developed by the enterprise blockchain platform Crossmint.

As a fully collateralized government bond, the token generates returns and is designed to serve as a medium of exchange for the 40,000 residents of the Marshall Islands, said Paul Wong, director of special projects at the Stellar Development Fund (SDF).

“Unlike a stablecoin, where the issuer actually earns a return, in this case the owner earns a return,” he said. Declutterwhich essentially describes USDM1 as a money market fund.

The distinction between A stable currency and government bonds may be somewhat trivial for Lomalo users, but USDM1 shows how governments can offer digital assets that serve a dual purpose while avoiding issues that could arise, for example, if a stablecoin were to lose its peg.

“All they care about is whether there is money in their account,” said Rodri Fernandez Touza, co-founder of Crossmint Declutternoting that Lomalo is built for simplicity.

Touza characterized features that crypto users have become accustomed to, such as seed phrases and “weird pop-ups,” as unworkable for the general public. As a result, these features are not present in Lomalo, where Crossmint generates and manages user credentials.

USDM1 payouts are made quarterly to eligible citizens in the RMI. That presents “an opportunity to digitalize the economy,” Wong said, for a country that is already dollarized and served by the U.S. Postal Service.

Shipping containers

In the Marshall Islands, physical cash is king, but not necessarily by choice.

A white paper tied to the debut of USDM1 details how the Marshall Islands became increasingly reliant on physical cash after several banks withdrew from the country following the 2008 global financial crisis.

As subsequent reforms changed risk-return profiles, many concluded that the corresponding banking relationships with the Marshall Islands were not worthwhile.

Today, the Marshall Islands has only one correspondent bank offering services such as domestic wire transfers, with a few domestic branches on the country’s islands. It is not unusual for citizens to travel long distances just to cash a check, the white paper said.

“If they lost that correspondent bank, it would be disconnected from the global financial system,” Wong said. “This instrument offers an alternative.”

Although the Marshall Islands are vast and cover an area similar to Mexico, the whitepaper notes that SpaceX’s Starlink has made internet access available everywhere. Yet the country is dependent on physical cash, which often arrives via shipping containers.

“Even if you want to make it work with cash, there are often limitations in the economy that prevent people from having access to money,” Touza said, explaining that some citizens travel long distances across water only to discover an empty ATM.

The RMI’s approval of USDM1 continues the SDF’s efforts to broaden access to financial services in hard-to-reach areas, including areas affected by geopolitical conflict. The development of USDM1 was funded with a multi-million dollar grant from the SDF.

Wong said the SDF is currently working with the German government to support payroll for health workers in the Middle East. The SDF is also working with the United Nations Development Program on several cash disbursement projects, he added.

Collaborate with a United Nations agency that works for refugees, the SDF helped found an auxiliary distribution system in Ukraine to support Circle’s USDC stablecoin. The SDF partnered with the Ukrainian government in 2021, resulting in the creation of a payment system.

Wong said the work has influenced the SDF’s approach to USDM1, including the idea that individuals are treated as the sole beneficiary of their digital funds. In practice, this could affect long-standing social dynamics for marginalized groups, he said.

“That risk of physical threat is much lower,” Wong said. “If you give universal basic income to a woman, it doesn’t go into a joint account where, historically, a man has used it for purposes other than the family.”