The Republic of the Marshall Islands used to be a US territory, and is now a sovereign country — though it’s still closely associated with the US, and uses the US dollar as its currency. About half of the Republic’s budget is US foreign aid.
The US used to test hydrogen bombs on the islands, and still owes the country over $500 million in reparations. Foreign aid from the US is due to be cut in half — from $60 million to $30 million — when the financial provisions of the Compact of Free Association between the US and the Marshall Islands expire in 2023.
So in March 2018, the Republic decided to issue its own currency, the Sovereign, or SOV — on a blockchain! Much like Facebook’s Libra, the SOV was strangled in the crib by regulators — and only dragged on for years because the crypto true believers promoting it wouldn’t take no for an answer.
The SOV Foundation, the non-profit overseeing the development of the project, will hold its presale for SOV in the next couple of months, just in case the Marshall Islands’ government, which is still deliberating whether to issue the coin, goes ahead with the project.
Dr. Dittus, who is also a former Secretary-General of the Bank for International Settlements (BIS), explained why it might be in favor of the coin. First, many of its inhabitants live or study in the US. “And they are spending lots of money, both ways, to children who are studying [abroad] and to the people who are working.”
Even simple things like acquiring and installing ATMs become complicated when you’re in the middle of the Pacific Ocean!
The country has a little over 50,000 people spread across 1000 Islands in the Pacific, and a centralized system would not be able to work. “It’s very difficult and very costly for normal people using Western Union or MoneyGram,” he said. Western Union charges $5 to send small amounts of money from the Marshall Islands to the USA. The SOV, built on Algorand, aims to reduce those transaction fees.
If implemented, the SOV will increase its monetary supply by 4% each year, meaning it would be a non-inflationary currency; an alternative to the existing fiat currencies. Still, in case of an “unexpected hiccup,” the nation still has the US dollar to fall back on. This would create a test case for cryptocurrency similar El Salvador who just make Bitcoin legal tender.
Originally the plan was to use a proof-of-work blockchain — though the press kit noted that global warming is one of the Marshall Islands’ biggest problems. Some fear the the energy use that comes with proof-of-work would contribute to the country literally disappearing beneath the waves. However, this fear was been address with the recent move to the Algorand proof-of-stake model.
A Brief History of the SOV Project
The SOV was thought up by Neema, an Israeli fintech. David Paul, the Marshall Islands government senator who was the main internal promoter of the SOV project, met Barak Ben Ezer from Neema in January 2018. Paul had never heard of Bitcoin or cryptocurrencies before this, but he thought: what have we got to lose?
The Marshall Islands had only one US dollar correspondent bank left: the First Hawaiian Bank, owned by BNP Paribas — everyone else had left because the islands weren’t much of a market. First Hawaiian already wanted to leave the Marshall Islands because they thought it was a regulatory risk, and were only holding on until the country could find another bank.
On 11 April 2018, the US ambassador sent the Marshall Islands government a letter expressing US concerns about the abuse of the SOV for money laundering and terrorist financing, and warned that the islands could be cut off from the world financial system entirely.
First Hawaiian told the Marshall Islands that they would almost certainly leave immediately if the government did the SOV as a cryptocurrency without the strictest of anti-money-laundering procedures in place.
The SOV plan was functionally dead. But reports continued through 2019 and 2020 that the SOV was still a thing that would totally happen once the regulatory issues were resolved — the issues that had already killed it.
The opposition won government in early 2020, but were initially fine with the SOV project continuing — though they commissioned a due diligence report. By late 2020, the project was being promoted by Neema spinoff SBF Tech, as a token on Algorand rather than a proof-of-work chain.
The new currency will be based on blockchain technology developed by Silvio Micali, the Ford Professor of Engineering in MIT’s Computer Science and Artificial Intelligence Laboratory (CSAIL), and commercialized by Micali’s startup, Algorand.
An increasing number of people are using Algorand for a wide range of applications, from creating carbon credit marketplaces to expediting real estate transactions and, in the case of the Marshall Islands, creating new legal tender.
Starting From Scratch
Silvio Micali has long been recognized for his work in cryptography and security. He’s been a member of MIT’s faculty since 1983, and in 2012 was awarded the Turing Award with his collaborator and fellow MIT professor, Shafi Goldwasser.
In 2017 Micali started from scratch to build a better blockchain.
Algorand also relies on an associated cryptocurrency to validate new blocks. The company calls the currency Algo coins. Rather than giving the power to validate new blocks to the people with the most coins, however, Algorand has owners of 1,000 tokens out of the 10 billion in circulation randomly select themselves to validate the next block.
The tokens are selected in a microsecond-long process that requires relatively little computing power. The random selection also makes the blockchain more secure by giving no clear target to hackers, helping Algorand solve the “trilemma” put forth by the Ethereum founder with a scalable, secure, and decentralized blockchain.
On top of that architecture, Algorand’s community has developed additional features tailored to specific functions, like smart contracts, which can self-execute based on predefined conditions in their code. Algorand has created a programming language called Transaction Execution Approval Language (TEAL) for this purpose. TEAL returns a true or false value depending on if specified conditions are met, simplifying the process of creating and executing contracts on the blockchain.
What does the Future Hold?
All this is well and good, but the Marshall Islands remains in dire economic straits. Parliament has considered setting up a Digital Economic Zone, to give crypto entrepreneurs a regulatory haven and, hopefully, dribble a few pennies toward the Republic.
The IMF warns that such a Digital Economic Zone “could prove highly susceptible to illicit financial flows and activity” — and the country doesn’t have the capacity to regulate the zone.
This zone could be set up on Rongelap Atoll, a former nuclear testing site strewn with radioactive fallout — just the place to put crypto scam artist and cyber criminals.
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