I have not found any answer about this so I share my fixed. I wanted to use mbsync with one IMAP server and encountered the following error.
IMAP command 'AUTHENTICATE DIGEST-MD5' returned an error: NO Authentication failed
A fix is to add the following to your ~/.mbsyncrc IMAPAccount declaration.
Using LOGIN instead of DIGEST-MD5 is still secure if you have an encrypted connection (IMAPS or STARTTLS). The login will be given plaintext inside the connection.