This week, it was reported that the Republic of the Marshall Islands, a country of 53,000 people in the Central Pacific Ocean, has taken steps to prepare for the issuance of its own cryptocurrency, the Sovereign (SOV). The primary distinguishing feature of the SOV is its adoption of the "Yokwe framework," an identification protocol that aims to avoid the relative anonymity of some other cryptocurrencies.
Ostensibly, users would be required to identify themselves on a blockchain network, a step that the government thinks would make the Sovereign suitable for a regulated banking system. The "Yokwe framework" (or "Yakwe framework," an alternative spelling) does not appear to be connected to any cryptocurrencies already in existence. "Yokwe" is a Marshallese word, which means "hello."
According to David Paul, minister-in-assistance to the president, the Marshallese legislature has given its approval for the SOV to be treated as legal tender. In a statement released late on Tuesday evening, the Marshallese government claimed, "This creates legal certainty for its use, because all jurisdictions have laws in place for dealing with legal tender, whereas private cryptocurrencies are dealt with differently in different jurisdictions."
To date, no countries have recognized stateless cryptocurrencies (e.g., bitcoin) as legal tender, though in April 2017, Japan's Financial Services Agency recognized them as a legal form of payment. On Tuesday, Germany's finance ministry announced that when used for purchases, cryptocurrencies will receive the same tax treatment as legal tender. Also, it's worth noting that just because a currency is declared legal tender in one nation, that does not mean that it will be accepted as such internationally (notwithstanding arrangements like the eurozone).
The Sovereign ICO
The SOV will be issued to the public through an initial coin offering (ICO), with its supply capped at 24 million tokens in an apparent effort to curb inflation. Paul explained to Reuters that the 24 million tokens correspond to the country's 24 inhabited islands, or atolls, each of which functions as an electoral district.
It's not apparent whether the SOV will be pegged to the dollar or some other unit, and it hasn't been reported how much each token would cost initially. The date of the ICO has not yet been determined, but Paul said that a presale will begin "soon."
ETHNews reached out to the Marshallese government to learn about the pricing structure for the ICO, potential secondary market trading, and the blockchain platform for the Sovereign. It's unclear whether the SOV will be launched on an existing blockchain platform (e.g., as an ERC20 on Ethereum), or whether the Marshall Islands will start from scratch. We have yet to receive a reply.
If the Republic of the Marshall Islands is concerned about inflation, going to the other extreme with a fixed money supply seems like a strange approach. Deflation can be just as damning for an economy. While a limited token supply appears to be a promising value proposition, deflation can rapidly discourage consumer spending and bring an economy to a grinding halt. A national cryptocurrency also raises difficult questions about how to facilitate economy-wide usage and how to control interest rates.
Relationship with The United States
Since 1983, the Marshall Islands has been party to a Compact of Free Association, through which they receive security and defense from the United States. According to the US State Department website, "The Government of the Marshall Islands is obligated to refrain from taking actions that would be incompatible with these security and defense responsibilities."
It is unclear whether the Marshall Islands cleared its cryptocurrency plans with officials from the United States. ETHNews contacted the US State Department to make an inquiry but has not yet to receive a response. American officials previously expressed concern about the petro, Venezuela's controversial, purportedly oil-backed cryptocurrency.
Regardless, for years, the Republic of the Marshall Islands has relied upon the US dollar as its own currency, so the SOV would be a significant break from the past. Paul said, "As a country, we reserve the right to issue a currency in whatever form it is, whether in digital or fiat form."
According to Finance Magnates, President Hilda C. Heine commented, "This is a historic moment for our people, finally issuing and using our own currency, alongside the USD. It is another step of manifesting our national liberty."
She added that the country will "invest the revenues [from the SOV] to support its climate change efforts, green energy, healthcare for those still affected by the US nuclear tests, and education. In addition, SOV units will be directly distributed to citizens." This will presumably be accomplished through a free allocation, though the government has not reported how much each citizen will receive.
A Fascinating Experiment
If all goes according to plan, the Marshallese government would have reserves to use toward its environmental, health, and education initiatives, and its citizens will adopt a new currency. The government would essentially distribute a new currency to its citizens and duplicate whatever money it brings in through the ICO, which is a highly unusual way of injecting more money into the Marshallese economy.
It's very difficult to determine how the value of the SOV and the dollar will interact in the Marshallese economy, but perhaps there will be an initial inflationary spike, which levels out over time.
A July 2016 staff report by the International Monetary Fund assessed that the Marshall Islands remained at "high risk of debt distress." Per the CIA's World Factbook, the Marshall Islands had an estimated GDP of $189 million for 2017, and over the last few years, public debt has hovered at around 30 percent of the country's GDP. The government is the country's largest employer and the United States has provided it money on an ongoing basis through the National Trust Fund.
Ultimately, it makes sense that a small nation is able to conduct this digital experiment, and it makes the Sovereign an intriguing and hopefully viable case study for modern economists.
ETHNews previously reported on the potential for innovative cryptocurrency monetary policy as discussed by Dr. Ole Rummel of the South East Asian Central Banks Research and Training Center.