A new paper by the International Monetary Fund (IMF) has highlighted the unique currency needs of Pacific Island countries (PICs) and suggested that digital currencies have the potential to meet these needs. However, the IMF cautioned against the use of unbacked cryptocurrencies as national currency.
PICs are small, diverse, and isolated markets that face specific challenges in terms of financial services and inclusion. These challenges include a heavy reliance on remittances and vulnerability to reduced correspondent bank services. Additionally, poor controls in PICs can make them susceptible to international Anti-Money Laundering efforts.
The development of local payment systems and the existence of a fiat currency vary among PICs. Some PICs do not have a local financial infrastructure at all. Most PICs primarily trade with larger countries outside the region. The IMF suggests that adopting a regional approach to digital currency could help address scalability constraints and economic volatility, although some PICs still lack adequate internet connectivity.
While the presence of cryptocurrencies in PICs was acknowledged by the IMF, they were dismissed as “poor substitutes for means of payment” due to their additional macroeconomic risks compared to other forms of digital money. The IMF recommends that digital solutions in PICs be tailored to local factors, including offline functionality for areas with low connectivity, extensive data collection to ensure sustainability, and upgrades to existing systems for interoperability and programmability.
The IMF’s overall stance on digital currency in PICs leans towards cautious and deliberate action. This aligns with previous advice given to PICs regarding their interest in other digital currency technologies. For example, the IMF opposed the legalization of decentralized autonomous organizations (DAOs) in the Marshall Islands and advised against the introduction of a central bank digital currency, citing unpreparedness.
In summary, the IMF recognizes the unique currency needs of PICs and suggests that digital currencies could address these needs with the right design features. However, caution is advised, and digital solutions should be tailored to local factors to ensure sustainability and effectiveness.