IMF: The Marshall Islands should seriously reconsider its national cryptocurrency
The downsides seem to far outweigh the potential benefits, the IMF says.
On 10 September the International Monetary Fund (IMF) released a new economic report on the Republic of the Marshall Islands (RMI), which gave special attention to the nation's plans to become the first country in the world to release a digital currency as legal tender.
"The potential benefits from revenue gains appear considerably smaller than the potential costs arising from economic, reputational, AML/CFT, and governance risks. In the absence of adequate measures to mitigate them, the authorities should seriously reconsider the issuance of the digital currency as legal tender," the report says.
To properly understand the extent of the risks, it's worth getting a bit of background.
Setting the scene
Banks all around the world are conducting heightened due diligence on their customers and growing into a stricter regulatory environment. This situation has already put the RMI at risk of losing its last correspondent banking relationship (CBR) with a US-based bank (First Hawaiian Bank, a subsidiary of BNP Paribas). If that goes, there's no way of easily moving funds in or out of the RMI.
This is not an isolated situation. The same factors are seeing the withdrawal of CBRs around the world, especially in the Caribbean, Middle East and North Africa.
It's largely a matter of business where the ever-growing cost of compliance procedures, especially in high-risk areas, means maintaining these relationships starts costing more than it's worth.
But for the Marshall Islands, this would be especially disastrous because:
- It's down to just one lifeline.
- It also uses the US dollar as legal tender.
- It's largely dependent on foreign aid, much of which comes from the US as a way of saying "sorry we nuked your island and gave y'all radiation poisoning".
- Climate change poses a constant and immediate threat to the RMI, which means the clock is ticking and it really needs money and it really needs it now.
The loss of that last banking relationship would instantly make things worse across all of those factors.
Why the RMI national crypto would make it worse
The RMI national cryptocurrency is intended to raise funds through an ICO and then function as legal tender. Experts might describe this arrangement as "super weird", and from a regulatory standpoint super weirdness usually means super expensive. The IMF seems to strongly expect these extra costs to be enough to drive away the RMI's last US correspondent bank.
Venezuela did the same thing, or at least made a good show of pretending it was, with the ICO legal tender. But it didn't have anything to lose, while the RMI has everything to lose.
That's not to say the idea of a national digital currency itself is terrible, or an ICO for it necessary. As the IMF notes, the RMI needs money. It needs to simultaneously find funding to keep growing local industries, to improve coastal protections against rising sea levels and extreme weather, to maintain reserves in the event of a natural disaster, to cover the expected shortfalls from upcoming drop-offs in foreign aid and more.
The RMI needs money, and ICOs are all about raising funds. It wasn't in a position to promise enormous technical achievements, but it was in a position to be the first to imbue a cryptocurrency with the practical benefits of being legal tender, almost like a regulatory cheat code.
For perspective, the RMI's annual budget is $100 million, $60 million of which comes from the US in aid. That $60 million is scheduled to be slashed to $30 million in 2023, which is yet another ticking clock hanging over the island.
At the time the idea was conceived, Block.One was in the middle of raising $4 billion to fund its noble goal of finding ways to make blockchains even less efficient; Telegram was awarded $1.7 billion in recognition of outstanding achievements in the field of technobabble; and DragonCoin raised over $300 million to combine the garishness and legal dubiousness of Macau's casinos on the blockchain.
Against that backdrop, the RMI might have been looking at the project as a way of condensing several years of economic growth into just a few months, at a time when there's no time to lose.
But haste makes waste, and even if it does all go to plan it might not be worth burning that correspondent banking bridge to make it happen.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA