The team behind a national cryptocurrency for the Republic of the Marshall Islands (RMI) – Sovereign (SOV) – said the coin was still actively developed despite previous disagreements among government officials, despite reservations by the International Monetary Fund (IMF ) and the US Treasury Department on this issue.
The idea behind the SOV project is based on the RMI government’s ambition to “express the national freedom [of the RMI]” as well as the creation of an alternative US dollar currency that the small island nation has used for decades.
Behind the scenes of the decision to publish a national crypto
The Republic of the Marshall Islands is an island nation near the equator in the Pacific Ocean and consists of 29 atolls and five individual islands, totaling some 1,225 islands. Managed by the US as part of the Pacific Islands’ Trust Territory over a 40-year period, the country gained independence under the Compact of Free Association in 1986.
Currently, the Marshall Islands use the US dollar as the official currency and are “heavily dependent on receiving and spending US grants.” According to the pact, this amounts to around 62 million euros per year. Once the SOV is issued, it will circulate alongside the dollar, so that the Marshall Islands will have two parallel currencies “for all debts, public dues, taxes and duties”.
The sovereign was first introduced in February 2018, when the Marshall Islands Parliament passed a bill providing for the release of its new national digital currency as part of an initial coin offering with an initial total of 24 million units to avoid inflation. Some of the cash collected by the ICO is said to be used to provide healthcare to some 53,000 citizens in the country who have been victims of US nuclear testing in recent years.
RMI President Hilda C. Heine said: “This is a historic moment for our employees, and finally, we are issuing and using our own currency in addition to the USD. It is another step to manifest our national freedom”.
To implement the SOV initiative, the RMI government entered into a partnership with the Israeli fintech startup Neema. Barak Ben-Ezer, CEO of Neema, told the press: “This cryptocurrency, the sovereign, is completely decentralized and the government can not control the money supply. After the Crowd Sale, they have no control over the currency.
Peter Dittus, chief economist and co-founder of SOV Global and former secretary-general of the Bank for International Settlements, told Cointelegraph that the decision to develop a national digital and not a national fiat currency has several reasons. According to Dittus, developing countries such as the RMI are struggling with the high cost of remittances, and a legal crypto-payment tool creates a situation in which the solution to costly remittances is “burned” into the monetary system itself. In addition, the introduction and implementation of a fiat currency managed by a central bank is costly, with “the cost outweighing the benefits for a small country”.
The further development of the SOV is called into question by the IMF and the US Treasury Department
However, later in September, the International Monetary Fund (IMF) expressed doubts about the issuance of SOV and argued that “the potential benefits of revenue increases appear to be much lower than the potential costs associated with the economic, respected, AML [Anti-Money Laundering ] / CFT [Combating terrorist financing] and governance risks”.
The IMF also warned the Marshall authorities about the introduction of the cryptocurrency and stated that this would jeopardize the country’s financial integrity and relations with foreign banks. The regulator called on the RMI to rethink the release of a cryptocurrency until the government is able to provide and implement “strong policy frameworks”.
Dittus pointed out that SOV will be different from most digital currencies as it has measures to prevent abuse. It highlights the need to work closely with regulators, financial institutions and stock exchanges to ensure that the rules of know-your-customer [KYC] apply, and that AML capabilities can not be circumvented. “This is supposed to enable the RMI to develop new governance capabilities and broader deployment of technology within the country.
Regarding the potential instability of the country’s financial system, which is caused by the volatile nature of the cryptocurrency, Dittus said that the establishment of a Bank of SOV in the RMI is planned, which will help provide SOV services to other banks, to hedge risk and facilitate transactions. However, Dittus added:
“Basically, there is neither a guarantee from the banks nor the government to convert SOV to USD at a fixed rate, which would limit financial instability.”
Heine’s plan to issue a state cryptocurrency triggers political instability
Despite the perceived benefits of the concept of a national digital currency, RMI President Heine faced a vote of no confidence in November in connection with her government’s plans to implement SOV. The vote was introduced by a panel of eight senators, and former President Casten Nemra said the plans to introduce a digital currency as a legal tender had negatively impacted the country’s reputation and reinforced the arguments of the IMF and the US Treasury ,
Six days later, Heine was reported to have survived the vote of no confidence. The Marshallese Parliament had allegedly voted 16-16, only one vote below the required number that would have led Heine to resign. RMI Finance Minister Brenson Wase said the government will move forward with SOV, waiting to meet the needs of the IMF, the US and Europe.
As a commentary on this situation, Dittus said:
“The IMF has approved CDBCs and its CEO Christine Lagarde has highlighted the potential benefits, especially for smaller economies. So far, however, no sovereign cryptocurrencies have been implemented. The Marshall Islands have been the first state to declare legal tender. The challenge now is to make it a reality. And that’s very motivating”.
The SOV team also announced that it had made “significant progress in finding partners, investors and developers” to implement the project and intends to launch SOV in 2019. The project also announced a new partnership with startup company Tangem, which operates from Switzerland and Singapore and offers “smart banknotes”.
While the initiative has been criticized by major financial organizations and government officials, the SOV team appears confident that the idea of the national digital currency and its implications for the country’s further development are viable.