In the past decade, ionic liquids (ILs) have received enormous interest as solvents for cellulose. They have been studied intensively for fractionation and biorefining of lignocellulosic biomass, for dissolution of the polysaccharide, for preparation of cellulosic fibers, and in particular as reaction media for the homogeneous preparation of highly engineered polysaccharide derivatives. ILs show great potential for application on a commercial scale regarding recyclability, high dissolution power, and their broad structural diversity. However, a critical analysis reveals that these promising features are combined with serious drawbacks that need to be addressed in order to utilize ILs for the efficient synthesis of cellulose derivatives. This review presents a comprehensive overview about chemical modification of cellulose in ILs. Difficulties encountered thereby are discussed critically and current as well as future developments in this field of polysaccharide research are outlined.