The unique circumstances of Pacific Island countries (PICs) require special consideration when it comes to currency. In a new paper, the International Monetary Fund (IMF) has determined that digital currencies have the potential to meet these specific needs, as long as they are designed correctly. However, the IMF also issued a warning against the use of unbacked cryptocurrencies as national currencies.
PICs are small, diverse, and geographically isolated markets that face various challenges related to financial services and inclusion. These challenges include a heavy reliance on remittances and vulnerability to reduced correspondent bank services. Additionally, PICs often struggle to comply with international Anti-Money Laundering efforts due to inadequate controls.
The development of local payment systems and the presence of a fiat currency differ among PICs, with some countries lacking any local financial infrastructure at all. Most PICs primarily engage in trade with larger countries outside the region. The IMF suggests that adopting a regional approach to digital currencies could help address issues such as limited scalability and economic volatility. However, this may be a lengthy process for some PICs that still lack sufficient internet connectivity.
The IMF acknowledges the existence of cryptocurrencies in PICs but dismisses their suitability as means of payment due to their many drawbacks. According to the IMF, cryptocurrencies are “poor substitutes” that carry additional macroeconomic risks compared to other forms of digital money. These risks include potential threats to monetary policy effectiveness, fiscal stability, financial integrity, and overall financial stability.
While digital solutions will vary depending on local factors, the IMF offers some general recommendations. These include offline functionality to accommodate areas with limited connectivity, extensive data collection to ensure the sustainability of the business model, and upgrades to existing systems to enable interoperability and programmability of digital currencies.
Overall, the IMF advises a cautious and deliberate approach to digital currencies. This advice aligns with previous recommendations made to PICs, as they have shown 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 the nation’s lack of preparedness.
In conclusion, digital currencies have the potential to address the unique currency needs of Pacific Island countries, provided they are designed appropriately. However, the IMF warns against the use of unbacked cryptocurrencies as national currencies. To ensure the success of digital currency initiatives, the IMF suggests considering local factors, such as limited connectivity, and implementing measures such as offline functionality and enhanced system interoperability. Taking a cautious and deliberate approach to digital currencies is crucial for the long-term stability and sustainability of PICs.