The Current Economic Situation in Tonga 
Source: Freepik
Tonga is classified as a low-middle-income country with a small, vulnerable economy. Its economic base is narrow, making the country heavily reliant on foreign aid, remittances, and key sectors like agriculture and fisheries. This makes the country susceptible to external shocks, such as the economic impact of COVID-19 and natural disasters, which have significantly affected growth and fiscal sustainability.
According to the International Monetary Fund (IMF), Tonga’s GDP in 2024 is estimated to be $0.55 billion. Agriculture forms the core of Tonga’s economy, contributing about 30% to GDP. Tourism ranks as the second-largest source of foreign currency, followed by remittances.
Remittances from Tongans living abroad, particularly in New Zealand, the United States, and Australia, play a critical role in the nation’s economy. With a large emigrant population, Tonga has one of the highest remittance-to-GDP ratios globally. In 2021, Tonga received an estimated USD 220 million in personal remittances, which accounted for around 44% of the country’s GDP. This flow of funds has been a major driver of economic growth and stability for the island nation.
“Remittances have played an important role in Tonga’s poverty reduction. In 2021, nearly 90 percent of households received remittances, which made up 45 percent of the country’s GDP.”
Notably, cryptocurrencies can be an effective way to overcome geographical limitations and widen economic opportunities. Cryptocurrencies can provide Tonga with a modern, inclusive, and resilient economic system that taps into global financial networks and increases economic opportunities.
The integration of crypto could also address the lack of financial services, providing greater access to banking. It could diversify the economy by attracting tech-driven investments and innovations. As well as opening up opportunities in the tourism sector where crypto payments are increasingly being accepted.
The Current State of Crypto Adoption in Tonga
Source: Freepik
Cryptocurrency adoption in Tonga is growing but not yet widespread. Although they are allowed for transactions, they are not considered legal tender in the country.
Tonga has been identified as a potential candidate for adopting Bitcoin as a legal tender, with discussions gaining attention since mid-2021. The country’s interest in crypto parallels El Salvador’s due to similar economic challenges. Tonga’s economy heavily depends on remittances, accounting for more than 30% of its GDP. This makes the country reliant on dollar-based institutions like the International Monetary Fund and the World Bank for loans.
Former Tongan MP Lord Fusitu’a has been a vocal advocate for crypto adoption. He proposed a bill in 2021 to make Bitcoin legal tender. He also suggested leveraging Tonga’s geothermal energy from its 21 volcanoes for Bitcoin mining. His initiative aims to provide universal basic income for citizens, a unique approach compared to El Salvador’s focus on infrastructure development.
The National Reserve Bank of Tonga has raised concerns about cryptocurrency volatility and has not approved its use as legal tender.
“Any investment of the country’s external reserves on any cryptocurrency is therefore highly unlikely, given its volatility and more importantly, it does not meet the minimum requirements for ‘high-quality assets’ and low credit risks,”
Despite this, informal adoption is growing. Tongans are using cryptocurrency for cross-border transactions and for receiving foreign aid and donations.
Following the 2022 Hunga Tonga-Hunga Ha’apai volcanic eruption, cryptocurrency donations played a role in recovery efforts. Tongan politician and crypto advocate Lord Fusitu’a established a Bitcoin relief fund to support the affected communities. Within three days, the wallet received over $40,000 from 250 donations.
Tonga is not a global leader in cryptocurrency adoption, but its dependence on remittances and limited banking infrastructure make it a potential candidate for greater use. Wider adoption could occur if regulations improve and access becomes easier.
Crypto Law and Regulations in Tonga
Tonga currently does not have a comprehensive legal framework for cryptocurrencies. The National Reserve Bank of Tonga has stated that cryptocurrency is not legal tender, and any entity offering crypto-related services must obtain a license, though none have been issued. The Reserve Bank also warned about the risks of investing in volatile assets like cryptocurrencies and noted that the adoption of a Central Bank Digital Currency (CBDC) is still under exploration.
There have been discussions about adopting Bitcoin as a legal tender, spearheaded by MP Lord Fusitu’a. He argues that it could reduce the high costs of remittance services, which currently take a significant portion of the funds sent back by Tongans abroad. However, this proposal has faced opposition, including from the Reserve Bank, and no legislation has been enacted yet.
Challenges of Crypto Adoption in Tonga
Source: Freepik
Tonga faces several challenges in adopting cryptocurrency, including:
Lack of regulatory framework
Tonga currently lacks a well-defined regulatory framework for cryptocurrency use. This creates significant uncertainty for businesses, investors, and individuals interested in adopting digital currencies. Without clear guidelines, people are unsure how to legally use, trade, or invest in cryptocurrency, which discourages broader adoption.
This gap also raises concerns about potential misuse, fraud, and the inability to protect consumers. The absence of regulations further deters foreign investors and crypto-related businesses from entering the market
Tonga’s government will need to establish robust policies to address money laundering, fraud, and consumer protection. A lack of clear rules may hinder trust and adoption.
Political Resistance
Tonga faces strong political resistance when considering cryptocurrency adoption. For example, the Reserve Bank has reportedly voiced opposition to legalizing Bitcoin. The bank cited concerns over stability and the risks of undermining the existing monetary system.
Moreover, the adoption process requires approval from Tonga’s Legislative Assembly and the king, making it a lengthy and uncertain path. Lord Fusitu’a, a key advocate for Bitcoin in Tonga, claims to have secured support from 12 of the 14 lawmakers required for legislative approval. However, aligning this political backing with institutional acceptance remains a significant hurdle.
Infrastructure and Financial Literacy
Access to the internet and financial tools is improving but remains a barrier.
According to Datareportal, “Tonga’s internet penetration rate stood at 57.5 percent of the total population at the start of 2024.”
This means nearly half the population lacks consistent access to digital resources essential for crypto use. Furthermore, many Tongans are unfamiliar with managing digital wallets or navigating crypto exchanges. Without targeted education initiatives, uptake among the broader population will remain low.
Examples from other countries show the importance of infrastructure and education. In El Salvador, where Bitcoin was adopted as legal tender, financial education campaigns accompanied its rollout. Tonga would need similar efforts to address the steep learning curve for cryptocurrency technology.
Volatility of Cryptocurrency
Crypto’s extreme price fluctuations pose a significant risk. For instance, Bitcoin’s value dropped from $69,000 in November 2021 to under $16,000 in November 2022. Such volatility can erode the value of remittances, which comprise 38-40% of Tonga’s GDP.
This unpredictability contrasts with the stability of Tonga’s traditional currency, the Pa’anga. While Bitcoin could reduce remittance fees (Western Union fees can exceed 30%), the risk of losing value during price swings may outweigh potential benefits for users dependent on these funds for daily living expenses.
Dependence on Traditional Banking
Tonga’s financial system remains rooted in traditional banking practices. Many Tongans use cash for transactions and rely on Western Union or MoneyGram for remittances. These systems have high fees but are trusted and familiar. Transitioning to cryptocurrency would require widespread trust-building and adoption among both consumers and merchants.
Additionally, cryptocurrency adoption in remittance-dependent economies can lead to regulatory concerns. For example, governments often rely on remittance inflows for foreign currency reserves. Crypto transactions, which bypass traditional banking systems, could reduce state control over financial flows, prompting hesitance among policymakers.
Potential Benefits of Crypto Adoption in Tonga
Source: Freepik
Low cost of remittances
Tonga is heavily reliant on remittances, which constitute over 30% of its GDP. A significant portion of the population works in countries such as Australia, New Zealand, and the United States, sending funds back home. Tongan households pay higher remittance costs than they need to because they opt to use higher-cost RSP (remittance service providers).
Traditional remittance methods like Western Union are costly, with fees ranging from 8-15% per transaction. The Reserve Bank of Tonga, for example, reports 83 percent of remittances going through Western Union in 2016, losing 12 percent in fixed fees and exchange rate losses.
Cryptocurrency offers a cheaper alternative, allowing families to retain more of the money sent to them. For example, crypto transactions can reduce remittance fees to under 2% by bypassing traditional financial systems. This savings is vital in a country where remittances are a primary economic driver.
Enhanced Tourism Payments
Tonga’s tourism industry accounts for about 13% of its GDP. Tourists often face challenges with currency exchange and transaction fees. Accepting cryptocurrencies can streamline payments for hotels, restaurants, and tours, offering convenience to international travelers.
Countries in the Pacific, like Vanuatu, have already begun accepting Bitcoin for tourism-related transactions. Incorporating cryptocurrency payments could attract tech-savvy tourists and reduce dependency on cash-based systems, which are prone to inefficiencies.
Efficient Aid and Donations Distribution
Cryptocurrency can play a role in making foreign aid and disaster relief donations more efficient.
After the Hunga Tonga-Hunga Ha’apai volcanic eruption in 2022, cryptocurrency donations helped support recovery efforts. Hundreds of Bitcoin donations were made to a Tonga relief fund set up to aid recovery efforts following a devastating volcanic eruption.
This fund was set up by Tongan politician and crypto advocate Lord Fusitu’a. The BTC wallet received more than $40,000 through 250 separate donations within three days of going live.
Cryptocurrencies ensure that aid reaches recipients faster and with lower administrative costs, bypassing intermediaries like banks. By leveraging cryptocurrencies on aid and donations, Tonga can address challenges tied to high fees, slow processes, and financial accessibility.
Economic Diversification
Economic diversification in Tonga through cryptocurrency adoption can provide new opportunities for growth. With a limited economy largely reliant on agriculture, tourism, and remittances, crypto could offer an alternative source of income.
Cryptocurrency adoption could open new avenues for blockchain-based businesses, digital nomads, and tech innovation.
This could help reduce the country’s vulnerability to external shocks and provide economic resilience. Additionally, crypto adoption could foster innovation in sectors like finance, technology, and e-commerce, creating jobs and broadening Tonga’s economic base.
Conclusion
Tonga is a low-middle-income country with a vulnerable economy that heavily relies on remittances. The adoption of crypto in this country can address key economic needs. This includes; enhancing remittance systems, streamlining tourism payments, and providing efficient methods for aid distribution.
However, crypto adoption still faces challenges like lack of clear regulatory uncertainty, political resistance, limited digital infrastructure, and low financial literacy.
Future adoption will depend on improved infrastructure, clear regulations, and education initiatives. If these challenges are addressed, Tonga could leverage cryptocurrency to strengthen its economy, diversify income sources, and build resilience against external economic shocks.
