The Marshall Islands, a nominally independent state associated with the United States and using the US dollar as its currency, at the end of September launched a preliminary sale of tokens of its future national cryptocurrency – the Marshallese sovereign or SOV, which is to replace the dollar as a legal tender over time. “It is another step of manifesting our national liberty,” President Hilda Heine said in a statement. The Marshall Islands is going to launch the world’s first legal tender cryptocurrency.
An unconventional status
The Marshall Islands is an island state in the Pacific Ocean, in the region of Micronesia, with indigenous people of the Austronesian language group comprising the vast majority of its 58K population. It is a United States associated state, a status Wikipedia explains as a form of protectorate – a cross between a colony and an independent state. Similar US semi-colonies include Palau, Puerto Rico, and the Federated States of Micronesia (FSM). FSM, the Marshall Islands and Palau in Oceania have a slightly higher status than Puerto Rico, where a statehood movement aims to make it a state of the US. The Marshall Islands’ sovereignty is in fact limited only by the presence of the US armed forces (with the inevitable environmental consequences from nuclear tests) and the use of the US dollar.
A positive consequence of this special status though is US economic assistance provided under a separate clause in the free association agreement. How the Marshall Islands would be faring without that assistance is unclear. Without it, the nation’s per capita GDP is about $1.6K – not much higher than in Kyrgyzstan, for example. At the same time, the human development index on the Marshall Islands is exceptionally high. Yet, only 19% of the population uses the internet, so the infrastructure for a broad introduction of cryptocurrencies is as good as absent. Even with the US assistance, the country suffers from the lack of significant mineral resources or tourist attractions. Fishing and farming are the only sectors that generate any real revenue (to develop its crop production, the country has as good as destroyed its forests). Tourism, although well-developed on many other Pacific islands, cannot yet generate significant revenue for the Marshall Islands.
A fiat cryptocurrency? Is this even a thing?
Last year, the government of the Marshall Islands announced the sovereign would be a “fiat-based cryptocurrency,” and would be regulated by a board of seven people, three of whom will be elected by the other four appointed by the government. The local media are hinting that launching an official cryptocurrency could be a solution to the problems facing the country, including the possible termination of US financial assistance in 2023 and the potential global sea level rise – they might need resources to evacuate the population, as the highest point of the Marshall Islands is 10 meters above sea level.
At the same time, the sovereign differs from other cryptocurrencies in that it is has a complex protection mechanism, has KYC, AML and CFT, and uses a special protocol, Yokwe, developed by the Israeli startup Neema (which means ‘hello’ and ‘welcome’ in the Marshallese language). In addition, it differs from the cryptocurrencies of Venezuela and Iran in that even with initial parallel circulation with the US dollar it will be a legal payment instrument to be traded at FOREX under SOV.
According to Environment Minister of the Republic of the Marshall Islands David Paul, the roots of the Marshall Islands’ effort started after the terror attacks on September 11, 2001, when the financial regulatory regime changed significantly and requirements to perform transactions became much more stringent.
Paul indirectly accused the US for the imperfect communication between the financial systems of the two countries:
“Right now we have only one relationship with one correspondent bank (First Hawaiian Inc.), and if that’s lost we would be cut off. A correspondent banking relationship is commercial, and a nation being held hostage by a commercial relationship shouldn’t be the case,” Paul said.
Pros and Cons
Taking into account the low population density and logistics problems the country is facing, does it have the necessary infrastructure to make operations in digital currency? In fact, due to satellite coverage and telecommunications, is it much simpler to introduce a national cryptocurrency than, say, establish a National Bank and print money on the paper that would be purchased from other countries. Thanks to the current blockchain technology, the Marshall Islands received the opportunity to have a national currency.
Unlike a Central Bank, which makes fiat currency from practically nothing by printing it and sending it to storages, the issuance of the sovereign will have part of this Central Bank which will go directly in the citizens’ pockets, that is, there will be a fair distribution of wealth in the moment of its creation in the economic system. It will have a huge positive influence on the country’s social, political and economic life. One of the funds to which the sovereign will be sent to is the Green Climate Fund of the Marshall Islands, aimed at facilitating the preparations for and relieving the aftermath of climate change, and at improving the economic stability on the Marshall Islands. The other one is the Marshall Islands’ Nuclear Claims Trust Fund that provides medical assistance to those who suffered from the US nuclear tests at Bikini Atoll.
Skeptics also have strong arguments – maybe even stronger than those of crypto enthusiasts. Using cryptocurrency requires internet access; internet connection on the Marshall Islands is rather slow and used by only 19% of the local population. This issue can be solved through investing in satellite communication and opening internet cafes as the number of smartphone users with internet access is small.
But most importantly, the country is facing the threat of extinction as a result of global warming. Cryptocurrency mining uses an exorbitant amount of electricity and generates huge CO2 emissions. Researchers estimate that bitcoin mining consumes 42 TWh of electricity per year, more than New Zealand’s annual electricity consumption, and causes some 20 megatons of CO2 emissions. The Marshall Islands use conventional diesel generators to produce electricity, with no green energy projects implemented. Should renewable energy projects have been considered first?
The idea of the Marshall Islands’ complete independence is highly questionable. The population of the islands, whose residents are of Micronesian origin, indeed has the right to sovereignty, just as other states in the Pacific Ocean do. Yet, unlike their numerous neighbors, the Marshall Islands have very limited resources. Agriculture, which is mostly represented by growing coconut palms, constitutes only a small part of the state’s exports. Its scarcity is plainly due to the small area: the islands’ land territory consists of atolls with a width of 100-200m and a road in the middle, with residential buildings and palms between them on both sides. It is not simply possible to grow many palms in such conditions. The islands boast vast fish resources but lack fleet. Yet, attaining complete sovereignty will provide the opportunity for leasing out fishing rights to water areas for Korean or Japanese fishing vessels, just as neighboring Kiribati does – yet, it does not help provide better living conditions there.
“Will the country be tempted to lease out some other thing – namely, a virtual ‘printing machine’ for the emission of the new cryptocurrency, which, unlike other alternatives, has a status of a legal means of payment?” asks Artyom Genkin, author of books and articles on emission of private currency and cash equivalents. “Several dozens of countries are known to have been given away the right to issue postage stamps with their exotic national symbols to a private company. But this is about vibrant-colored printing products which are of interests to a small community of stamp collectors. As regards legal cryptocurrency, motivation for its use may be totally different,” Genkin says.
By Roman Mamchits