Author: Jonas Gross
Central bank digital currencies (CBDC) are on the rise. More and more CBDC projects are now reaching the test stage and are approaching the actual issuance of the digital currency. In addition to China, this also includes the Pacific island nation of the Marshall Islands. But what distinguishes this project from other CBDC initiatives? With the help of an own CBDC, the Marshall Islands aims to combat the consequences of climate change.
Marshall Islands: SOV as second legal tender
As early as 2018, the Republic of the Marshall Islands, with its almost 50,000 inhabitants, released plans to issue its CBDC, the so-called Sovereign (SOV). A first-class team was assigned to the project, including Dr. Peter Dittus, former Secretary General of the Bank for International Settlements (BIS). Up to now, the Marshall Islands has not had their own national currency — the US dollar has been legal tender. This is now to change. After its introduction, the SOV will be the second, exclusively digital, legal tender. The respective legislation has already come into force in 2018.
Advantages of the SOV: Lower transaction costs and higher financial inclusion
But what are the advantages of the SOV? The traditional payment systems in the Marshall Islands has so far been relatively inefficient. The costs of money transfers often amount to more than 10%. The SOV aims to significantly reduce transaction costs and thus increase the efficiency of payment systems.
Moreover, a large part of the Marshall Islands’ population is currently excluded from the digital financial system. By far, not everyone has a bank account. Therefore, another goal of the SOV is to increase financial inclusion, since no bank account is required for in SOV-denominated transactions.
SOV reduces dependence on the USA
In addition to social motives, the Marshall Islands also follows financial motives with the SOV. Currently, the Marshall Islands is highly dependent on financial aid from the USA. Financial aid currently amounts to 20% of annual gross domestic…