IMF Urges Marshall Islands To Reconsider Cryptocurrency Plans

News | September 12, 2018 By:

The International Monetary Fund (IMF) has warned the Republic of the Marshall Islands (RMI) about the risks of issuing a national cryptocurrency.

In February of this year, Marshall Islands, a country located near the equator in the Pacific Ocean, passed the Declaration and Issuance of the Sovereign Currency Act 2018. The purpose of the bill is to declare and issue its own cryptocurrency as an official legal tender, to be known as the Sovereign (SOV). The government partnered with Israeli startup Neema to develop the cryptocurrency, and an initial coin offering (ICO) has been scheduled for later this year.

“This is a historic moment for our people, finally issuing and using our own currency, alongside the USD,” Marshall Islands President Hilda C. Heine said at the time. “It is another step of manifesting our national liberty. Allocating SOV units directly to the citizens will circulate the currency and distribute wealth efficiently to our people.”

On Monday, however, the IMF published its 2018 Marshall Islands country report advising against the country’s crypto plan. The report encouraged local authorities to be cautious about issuing a decentralized digital currency as a second legal tender and carefully consider the macroeconomic and financial stability risks.

“The potential benefits from revenue gains appear considerably smaller than the potential costs arising from economic, reputational, AML/CFT, and governance risks,” the report said. “In the absence of adequate measures to mitigate them, the authorities should seriously reconsider the issuance of the digital currency as legal tender.”

The IMF said that 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 US dollar correspondent banking relationship (CBR).

“If RMI’s only domestic bank lost its last US dollar CBR, external aid and other flows could be disrupted, which would result in a significant drag on the economy,” the IMF said.

The law requires that all users of the planned national cryptocurrency undergo standard KYC procedures and that their identity be recorded on the blockchain. However, the IMF said the country has not establish the content of the standard KYC procedures and the modalities of their implementation.

“In light of the potential for digital currencies to be misused for money laundering and terrorist financing (ML/FT) purposes, the issuance of the SOV without effective implementation of comprehensive AML/CFT measures could offset recent progress in strengthening the AML/CFT framework, leading to increased scrutiny from the AML/CFT standard setter and potential countermeasures, including, possibly, the immediate loss of the CBR,” the IMF said.