IMF advises Marshall Islands against using crypto as legal tender

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The International Monetary Fund (IMF) has cautioned against plans to issue cryptocurrency as a form of legal tender in the Republic of the Marshall Islands, in response to a consultation process launched by the central Pacific island country.

The Marshall Islands passed laws back in February which would see the creation of a new cryptocurrency known as the ‘Sovereign,’ to be used as an alternative legal tender in a bid to strengthen the local economy and ensure greater connectivity with global financial systems.

However, in a paper published this week, the IMF said the plan carried potential risks for the Marshall Islands’ economy, citing fears over its dependence on external aid and the threat of natural disasters in the region.

The report highlighted that the sole remaining commercial bank in the Marshall Islands could lost its “last U.S. dollar correspondent banking relationship (CBR) with a U.S.-based bank” with tightening compliance rules in the United States, while suggesting the move could actually increase the risks of isolation from the mainstream global financial system.

“In the absence of adequate risk mitigating measures, the issuance of a decentralized digital currency as a second legal tender would not only increase macroeconomic and financial integrity risks but elevate the risk of losing the last U.S. dollar CBR,” according to the IMF report.

According to the IMF, losing the U.S. dollar CBR would have immediate and significant consequences for the Marshall Islands, disrupting aid channels as well as causing serious commercial and economic difficulties.

The IMF report was published in direct response to the consultation process around the Marshall Islands’ Sovereign plan. But some commentators have suggested it could offer insights into the IMF’s view on the role of cryptocurrencies in future.

While the report highlighted the challenges facing the Marshall Islands project, it called on central banks to do more to integrate the benefits of cryptocurrencies and blockchain technology more effectively within the global financial system.

It remains to be seen whether the Marshall Islands heeds the IMF warnings, and whether the plan will proceed any further. While cryptocurrencies might not be a workable solution for the Marshall Islands, the IMF report remains optimistic on the benefits of the technology more broadly.