The Marshall Islands’ recent decision to use a US dollar-backed stablecoin as one of the mechanisms for delivering a universal basic income (UBI) reflects the practical challenges of providing financial services across one of the world’s most geographically dispersed nations, where many households lack reliable access to banks.
The new Lomalo digital wallet will distribute welfare payments in USDM1, a tokenised instrument issued on behalf of the Marshall Islands government and fully collateralised by short-term US Treasuries under a New York law indenture. Whether it qualifies as a “stablecoin” – the shorthand used in public reporting – is disputable because stablecoins are, by definition, privately issued instruments, whereas USDM1 is a sovereign obligation issued through a government-mandated structure. The International Monetary Fund (IMF) has characterised its structure as that of a “digital sovereign bond”, aligning more closely with sovereign debt, even if it operates like a stablecoin in practice.
Services taken for granted elsewhere, such as bank branches, ATMs, foreign-exchange dealers and even the ability to open an account, remain inaccessible for large parts of the population.
This is an unusual development, but not an isolated one. Palau, Solomon Islands and other Pacific states have also begun experimenting with digital payment systems as traditional banking networks recede. What is emerging in the region is not a story of crypto hype but a response to the erosion of banking infrastructure that has left Pacific states searching for viable mechanisms to deliver core financial services.
Within this context of financial fragility, the IMF notes that the Marshall Islands’ newly established UBI initiative is intended to cushion households from rising cost-of-living pressures and provide predictable support in an economy marked by limited formal employment and financial access. The scheme is also framed as a way to help stem heavy out-migration by offering a more stable social safety net in a setting of structural fragility and demographic loss.
While the broad objectives are clear, the precise funding architecture remains only partially specified. Current plans rely on annual drawdowns from the Compact Trust Fund (backed primarily by US contributions) and, to a lesser extent, revenue associated with USDM1.
Pacific financial systems have been under pressure for some time. Commercial banks have steadily withdrawn correspondent relationships across the region, citing low profitability and the cost of meeting global anti-money-laundering standards. Those withdrawals have weakened the ability of states to clear international payments, maintain remittance channels and distribute government funds to remote areas. Banking is expensive and inefficient for many small island states because it is geographically sparse, capacity-constrained and increasingly unreliable. Services taken for granted elsewhere, such as bank branches, ATMs, foreign-exchange dealers and even the ability to open an account, remain inaccessible for large parts of the population.
This is the context in which digital wallets and stablecoins have become attractive. Majuro’s interest in USDM1 reflects logistical realities rather than crypto enthusiasm as it enables direct transfers to citizens without bank accounts, reduces the burden of moving physical cash across dispersed atolls, and provides a payment channel that is not dependent on increasingly fragile correspondent-banking links through the Lomalo wallet.
USDM1 does not resemble the speculative tokens that dominate cryptocurrency markets. The government emphasises that it is issued under New York law, backed by short-term US Treasuries, held in a bankruptcy-remote structure by a US-based custodian, and designed with redemption mechanics that mirror sovereign-debt obligations. In functional terms, it is closer to a tokenised Treasury bill than to a conventional crypto asset.
Stablecoins may appear unnecessary from the vantage point of mature banking systems, but that assumption breaks down in the Pacific.
These innovations come with risks. The IMF has repeatedly warned that digital-asset projects in the Pacific could generate macro-financial vulnerabilities, particularly where supervisory capacity is limited. Concerns include fiscal pressures from expanded liabilities, financial integrity risks arising from weak anti-money-laundering/know your customer frameworks, shocks from redemption flows, and operational vulnerabilities in digital systems. The IMF has also advised that the Marshall Islands’ UBI scheme be more narrowly targeted to maintain fiscal sustainability.
Stablecoins may appear unnecessary from the vantage point of mature banking systems, but that assumption breaks down in the Pacific, where infrastructure is thin, uneven and deteriorating. With limited access to banks, weakening correspondent links and high cash-distribution costs, digital payment systems fill a real gap. They are emerging not as a technological novelty but as a substitute for banking infrastructure that can no longer meet basic needs.
For Australia, the significance lies not in the Marshall Islands itself, which sits within the US compact system, but in the precedent it sets. Other Pacific governments facing similar banking constraints may turn to digital payment rails as traditional banking deteriorates. Canberra has already invested in maintaining regional banking access, working with the United States and the World Bank through the Pacific Banking Forum to address de-risking and correspondent-bank withdrawals.
The forthcoming Australian digital assets framework, expected to introduce licensing requirements, reserve standards and governance rules, could become a useful tool for regional engagement. Rather than treating stablecoins solely as a domestic regulatory matter, Australia could share elements of its framework with Pacific partners, support supervisory capacity-building and work with central banks to test digital payment systems. The aim would not be to promote stablecoins but to ensure that their adoption does not outpace regulatory oversight or undermine financial stability.
The Marshall Islands’ UBI program signals a shift that could accelerate across the region. As banking networks continue to contract, digital payment systems will become increasingly attractive to Pacific governments confronted with shrinking banking access and the need for workable alternatives. Key for Australia is to approach this change not through the lens of cryptocurrency optimism or scepticism but as a potential structural transformation in the region’s financial architecture.