The Marshall Islands shocked the world in 2018 when it announced its intention to create a new cryptocurrency – Sovereign Coin (SOV) – which would be used as its legal tender.
However, creating a cryptocurrency as a legal tender is a difficult process with no precedent. And it raises a lot of questions. The remote Pacific country spread out over more than 1,000 islands has had to engage in lengthy discussions with various stakeholders from the US Treasury to the United Nations.
Coin Rivet spoke to blockchain strategist and SOV adviser Steve Tendon to find out more about what makes the Marshall Islands’ cryptocurrency so unique.
As a key member of Malta’s Blockchain Task Force, Tendon’s company Chain Strategies has been instrumental in promoting the growth and expansion of the “Blockchain Island”. Now, he’s eyeing the real possibility of creating a cryptocurrency as a legal tender for the first time.
The Sovereign #SOV is
SEIGNIORAGE assigned to important policy goals (climate change) or
DISTRIBUTED DIRECTLY to holders &
A new form of **democratic distribution of wealth**.
— TΞNÐ0N (@T3ND0N) September 18, 2019
Why create the SOV cryptocurrency in the first place?
The Marshall Islands is extraordinary in many more ways than just its geography. About halfway between Hawaii and Australia, the islands rest on top of submerged volcanoes and have an average elevation of just two metres above sea level. Much of the 1,156 islands are uninhabitable for various reasons, from lack of rain to nuclear contamination.
Tendon explains: “The Marshall Islands have not only been subject to enormous bomb testing in the past with Bikini Island, but it is also one of the very first countries that will suffer enormously because of climate change and rising sea levels. Moreover, the acidification of the seas will literally erode the base of these islands that are made of coral.”
A rising global temperature affects both the ecology and fisheries as well as one of the Islands’ largest industries, which is coconuts.
“These are easily affected by lack of water,” he says, “and finally rising ocean levels are a huge problem. The average elevation is only two metres above sea level. So on a normal day with bad weather, most of these islands are underwater.”
Added to this list of growing pressures is the fact that in 2023, funding from the US will come to an end. This creates a huge additional strain on the Pacific nation. Tendon stresses:
“The country is at serious risk of disappearing like Atlantis, covered over by the sea. The ambition behind the SOV cryptocurrency is to create a digital infrastructure so that if this catastrophic scenario where a country disappears happens, the citizens will still have their digital legacy and information safeguarded on a blockchain. I stress this point ‘safeguarded on a blockchain’, because the SOV is a cryptocurrency that will exist on a blockchain, not a central bank digital currency in a server farm on land.”
Preserving RMI citizens’ digital identities
“One driver here which we must not forget is connected to resilience and sustainability,” Tendon explains. The Marshall Islands has never had its own legal tender but makes use of the US dollar. Yet, as a recognised country by the United Nations, it has the right to create its own legal tender.
But while the Marshall Islands could follow the examples of every nation that’s gone before it and print its own money, it chooses an option that gives its citizens a sustainable solution to their pressing challenges.
“A central bank digital currency will still reside on a central bank’s infrastructure,” says Tendon. “So materially it will be in some server farm, but still on land, so to say. The resilience and sustainability issue that the Marshall Islands wants to address is that, if their land disappears, they still want to be Marshallese and have their digital information preserved. They still want to function as a country even though many may be forced to migrate to other shores.”
Rolled out in a timed release
At the recent Invest: Asia cryptocurrency conference, the Marshall Islands announced that the SOV cryptocurrency would be rolled out slowly in a Timed-Release Monetary Issuance (TRMI). Since many of the finer details of the SOV are still being worked on by economists, technologists, and mathematicians, it won’t be the SOV that people are buying, but units that will later be exchanged for it.
The non-profit SOV Development Foundation is the institution helping the government research and test this idea through a “TRMI” or Time Release Monetary Issuance. In cryptoworld, this could also be seen as a Pre-sale. It tests the security, exchange liquidity and market interest
— Blockchain Center of Excellence (@UAWalton_BCOE) September 12, 2019
But if the isolated country is facing so many pressing issues now, why choose to roll out its legal tender over such an extended period with no concrete release date set?
Well, because it’s a complicated situation.
“We are not just dealing with a cryptocurrency,” Tendon explains. “We are not dealing with a token, even if those are elements and aspects of what’s happening. We’re dealing with a legal tender, so real money for a real country…
“Of course, there is a huge concern that rapid adoption driven by speculative investors as we’ve seen in the ICO space could provide some serious monetary instability. So this timed release is a way to make the start uptake of the currency somewhat controlled and dampened in time, rather than one offering where everyone is rushing for it.”
The TRMI will take place over a period of 18 months before being converted 1:1 into the actual SOV cryptocurrency. The idea is to keep the speculators out and to ensure that only long-term investors come on board.
What about the infrastructure necessary for the SOV cryptocurrency to work?
Taking into account the widely dispersed population and logistical issues the country faces, does the country have the necessary infrastructure for its citizens to transact in digital currency? Actually, thanks to satellite coverage and telecoms, Tendon explains that “it’s actually much easier to deploy than, say, setting up a central bank, printing money, and shipping boxes of paper around”. This would be far costlier than making use of technology, he says, adding:
“Up to this date, the Marshall Islands has not had its own currency. It has been using the US dollar. They now have the opportunity to do it with cryptocurrency and all the benefits of technology… it is a unique situation. They have their right to have their own money, to print their own money, and they choose to do it through the best of both worlds with elements of crypto. It’s a very fortunate combination of circumstances that makes this possible.”
The Marshall Islands is its own state and not part of an association such as the EU. This gives it the freedom to create the SOV cryptocurrency.
“In Malta, such conversations were happening,” Tendon says, “but materially it would never have been possible. Malta is part of the EU. We all know what happened when Estonia tried to promote Estcoin – it was not allowed.”
The implications of a currency with legal tender status
We’ve seen other countries come out with their own cryptocurrencies already, such as Venezuela’s Petro and Iran’s PayMon. However, Tendon stresses that SOV is an entirely different animal. First of all, it is more than a cryptocurrency, and it “is not a device to circumvent US sanctions”. It will have legal tender status. This has a couple of huge and very different consequences.
“Legal tender means that within the Marshallese economy, this currency must be used. So, if I issue an invoice in SOV, there is an obligation to pay it in SOV. Likewise, taxes and social benefits will be made in SOV, so the purpose is very different.” He continues:
“Also as legal tender in the United Nations, it is very possible that it would be exchanged on the Forex exchange markets. That is very different from other cryptocurrencies. The intent is to keep out the speculators and to tie the usage of the SOV to the real economy; not just the local Marshall Islands, but also a means of payment for e-commerce. The overall intent is to expand the reach of the SOV beyond the physical shores of the islands and promote its usage in all sorts of electronic transactions.”
How will the SOV actually work?
If you’re interested in finding out more about the SOV, it’s definitely worth giving the white paper a read, even though much of the factors are still TBD against a ticking clock. Unlike cryptocurrencies such as Bitcoin or Ether, SOV will have KYC, AML, CFT, sanction list filtering, and identity built into its technology – all the while providing very strong guarantees for privacy. This will help the Marshall Islands with its compliance burden in the international fight against money laundering.
Moreover, unlike a central bank digital currency, the monetary policy of the SOV “will not be established by the whim of some central banker who wakes up some morning and decides that a new round of quantitative easing is necessary. The monetary policy of the SOV cryptocurrency is hard-coded on-chain. So it is established algorithmically with a 4% inflation rate per year.”
The economists behind the SOV are further striving to implement Nobel prize winner Milton Friedman’s so-called K-per cent rule.
Tendon explains: “It’s like a monetary policy that has been envisioned in theory but no country has been able or willing to put it into practice, and here we will do it on-chain. So the monetary policy becomes like the Constitution that cannot be changed.”
The socio-economic impact of SOV
There are also the social dimensions of the SOV. Tendon states: “This is this idea that when the SOV is mined or minted (we don’t know what term to use yet because it is both a cryptocurrency and a conventional currency), but basically when it is created, the SOV will also directly benefit the SOV holders, and in particular the resident citizens of the Marshall Islands…
“So unlike a central bank that creates money out of nothing by printing it and that money goes into the vaults of the central bank, in the issuance of the SOV, there will be a part of it that goes directly into the pockets of the citizens, pioneering new ways to fairly distribute wealth at the moment it is created in the economic system. This will have enormous social, economic, and political consequences.”
As per the white paper, a percentage of the issuance of the SOV cryptocurrency will be designated to predetermined funds in a bid to help the RMI deal with the unfortunate multiple environmental disasters it faces.
One of these funds is the Marshall Islands Green Climate Fund to help prepare for and mitigate the impact of the effects of climate change, as well as to increase sustainability in the Marshall Islands. The other is the Marshall Islands Nuclear Legacy and Health Care Fund to help those affected by nuclear testing.
No other country has ever done anything like this before. This makes the SOV so much more than a national legal tender or cryptocurrency designed for speculative intent. Woven into its very fabric is a pressing social need to address the very real problems the Marshall Islands faces.
How is the value of the SOV determined?
The SOV may unite the “best of both worlds” as Tendon says, and it may be entirely different from the national cryptocurrencies we’ve seen before like the Petro or PayMon. But these cryptocurrencies have been supposedly backed by oil or gold. How is the SOV’s value going to be determined and what will it be backed by, if anything?
Tendon stresses that the ideas for this are still “very much on the drawing board”. However, the plan is that the SOV’s value is determined through market mechanisms.
The idea is that the SOV reflects the value of the real economy (physical or electronic) that will adopt it, just like any other national currency, only that its adoption could be much larger than the boundaries of the Islands.
He concludes: “Connecting all the dots, the SOV is a cryptocurrency on a blockchain which will eventually lead to a pervasive infrastructure that will allow the country to become more resilient with respect to these environmental issues. And if in all this the SOV is adopted for e-commerce and transactions beyond the shores of the Marshall Islands, that would give it more power.”
What is the timeline for the SOV?
When asked when we can expect the country to start the roll-out of the TRMI and the SOV, Tendon laughs and says that “no one has a crystal ball”. However, he does concede that recent events in the crypto space have accelerated the work that is being done.
He is referring to various significant efforts to launch a global cryptocurrency by Facebook, Binance, China, and even the central bank of England announcing tentative plans for a Synthetic Hegemonic Currency.
“The trend is clear. There are many capable forces in the market that are waking up to this idea that a global currency has several points of interest – and there are many stakeholders that would like it to happen. To tie this back to the SOV, it could easily become that kind of global currency.”
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