IMF urges careful design, slow introduction for Pacific Island digital currencies

Conditions in Pacific Island countries (PICs) create unique currency needs. Digital currencies are up to the task of meeting those needs, with the right design features, the International Monetary Fund (IMF) found in a new paper. At the same time, it warned against the use of unbacked cryptocurrencies as national currency.

PICs are tiny, diverse and geographically isolated markets with particular servicing and inclusion challenges, such as a high dependence on remittances and vulnerability to reduced correspondent bank services. They are also liable to run afoul of international Anti-Money Laundering efforts because of poor controls.

PICs differ by the development of local payment systems and whether they have their own fiat currency, among other things. Some PICs have no local financial infrastructure at all.

It’s great to see the fruits of last year’s IMF Conference in Fiji

The departmental paper, “Rise of Digital Money: Implications for Pacific Island Countries,” delves into the fast-evolving landscape of digital money in a diverse region of extremes in size, remoteness and… pic.twitter.com/z4c8qrHB4S

— Jay Hunter Anson (@JHX_1138) February 27, 2024

PICs predominantly trade with large countries outside the region. Developing a regional approach to digital money would help mitigate problems such as scalability restraints and economic volatility, the IMF said. The path of digitization may be long for some PICs that do not have even adequate internet connectivity yet.

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The IMF noted the presence of cryptocurrencies in PICs and dismissed their applicability with one sentence, calling them “poor substitutes for means of payment, and they carry additional macroeconomic risks compared to other forms of digital money (for example, risks to the effectiveness of monetary policy, fiscal risks, risks to financial stability, financial integrity, etc.).” The authors note:

“Some PICs are more prone to currency substitution by crypto assets and stablecoins due to weak confidence in their domestic monetary systems and the absence of other publicly supported digital assets such as CBDCs [central bank digital currencies].”

Digital solutions will depend on local factors, but the IMF has a number of general recommendations. They include offline functionality due to low connectivity, high data collection to ensure the sustainability of the business model, and upgrades to existing systems to provide interoperability and programmability of the digital money.

In general, the report leaned toward slow, deliberate action on digital currency. This advice has been heard there before, as PICs showed interest in other digital currency technologies. The IMF opposed the Marshall Islands’ legalization of decentralized autonomous organizations (DAOs), for instance. It also urged the island nation to hold off on its plans to introduce a central bank digital currency, citing its unpreparedness.

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