Marshall Islands Test Crypto for Universal Basic Income as Cash and Banks Fall Short

Access to financial services is shifting in the Republic of the Marshall Islands (RMI), as the island nation begins using digital assets 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 enterprise blockchain platform Crossmint.

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

“Unlike a stablecoin, where the issuer is actually earning yield, in this case, the asset holder is earning yield,” he told Decrypt, describing USDM1 as effectively a money market fund.

The distinction between a stablecoin and sovereign bond may be somewhat trivial to Lomalo’s users, but USDM1 shows how governments can offer digital assets that serve dual purposes, while avoiding issues that may arise, for example, if a stablecoin were to lose its peg.

“All they care about is whether there’s money in their account,” Crossmint co-founder Rodri Fernandez Touza told Decrypt, noting that Lomalo was built for simplicity.

Touza characterized features that crypto users have grown accustomed to, such as seed phrases and “weird popups,” as unworkable for the general public. As a result, those features aren’t present in Lomalo, where Crossmint generates and manages user credentials.

USDM1 disbursements are made quarterly to eligible citizens in the RMI. That provides “an opportunity to digitize the economy,” Wong said, for a country that is already dollarized and serviced 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 USDM1’s debut describes 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 altered risk-return profiles, many concluded that corresponding banking relationships with the Marshall Islands weren’t worth it.

Today, the Marshall Islands has only one correspondent bank that provides services such as domestic wire transfers, with a few domestic branches across the nation’s islands. It is not uncommon for citizens to travel far distances just to cash a check, the white paper states.

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

Although the Marshall Islands are vast, covering an area comparable to Mexico, the whitepaper notes that SpaceX’s Starlink has made internet access widely available. Still, the country relies on physical cash, often arriving via shipping containers.

“Even if you want to make it work with cash, there are many times where constraints in the economy prevent people from having access to money,” Touza said, explaining that some citizens travel large distances by water, only to discover an empty ATM.

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

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

Collaborating with a United Nations agency dedicated to refugees, the SDF helped establish an aid distribution system in Ukraine supporting Circle’s USDC stablecoin. The SDF partnered with the Ukrainian government in 2021, resulting in the creation of a payments system.

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

“That risk of physical threat is much lower,” Wong said. “When you distribute universal basic income to a woman, it’s not going to some joint account where, historically, a man has used it for purposes other than the family.”