In early October 2016, while I was working on an early draft of Malta’s National Blockchain Strategy, I wrote the phrase “Blockchain Island” for the first time. I was pleased with how succinctly it described the central problem we were trying to solve: the issue of integrating cryptocurrencies with traditional financial, legal, and regulatory systems – and catering for the ubiquitous use of Blockchain technologies.
When I wrote it, I never suspected how much influence the Blockchain Island concept would end up having, in Malta and beyond – or how quickly the intent behind the phrase would be lost.
My plan was for Malta to create a fully virtual jurisdiction which could connect cryptocurrencies and Blockchain technologies to the rest of the global financial system, a bold move which Malta was ultimately unwilling to take. But now the Marshall Islands, a country facing multiple looming existential threats, seems willing to take up the mantle with its new hybrid crypto-fiat-currency, the Marshallese sovereign (SOV).
What is the Blockchain Island?
It is hard to overstate the innovative potential of cryptocurrencies. From a financial perspective, cryptocurrencies offer a number of clear and unique advantages over existing technologies and currencies, including almost real-time, cross-border, peer-to-peer transfer and settlement of values at affordable fees.
But that’s just the beginning. The technologies underpinning cryptocurrencies allow us, for the first time in history, to establish ownership rights of digital assets. Through real asset tokenization and fractionalization, such rights can extend to include any other immaterial or material assets. Tokenization can provide digital identity management of people and things. Developments in the area of decentralized computation (i.e., smart contracts) promise new kinds of automation across organizational and jurisdictional boundaries.
The advantages of these technologies are too compelling to ignore. Yet the unique potential of blockchain and cryptocurrencies is also proving its downfall: they’re so different from everything that’s come before that no-one can agree on how to integrate them with our existing economic, technological, and legal systems. So cryptocurrencies exist in isolation, a tiny island separated from the real economy (the “mainland”).
The advantages of crypto-technologies will not be realized unless there is mass adoption. Mass adoption can only be achieved with network effects. Yet cryptocurrencies are what make this impossible. The current crypto-sphere simply isn’t big enough for network effects to take hold, and it cannot grow bigger without being integrated with the wider economy. Today’s financial systems move trillions of dollars on a daily basis, while the crypto-economy is barely a few billions. Likewise, the financial system counts billions of account holders, while there are only a few million crypto-wallet holders.
We need to find a way to connect the crypto-economy to the real-economy mainland. That’s the core of the Blockchain Island vision, and it also provides a hint at who is best placed to provide the solution.
The Promise of the Virtual
Malta understands the problem of being an island well. Like many other small island states, Malta has limited physical space and almost no natural resources. But constraints can often be empowering. With traditional industries off the table, Malta has turned to regulatory services, seeing tremendous economic success in the fields of financial services, vessel registration, insurance and especially iGaming.
Blockchain seemed a natural extension of this approach: my idea was to create a new kind of virtual jurisdiction, right there in the new crypto-sphere established by these technologies. Since this crypto-sphere is an entirely virtual space, landmass and natural resources are no longer relevant. This allows even the tiniest country to potentially compete with other superpowers for economic prominence and become a global player.
Tiny Malta would be the first to plant a flag in this new space; just like Christopher Columbus did when landing in the New World, or when Neil Armstrong took that first small step onto the moon. Malta would be a bridge, connecting the blockchain island to the mainland economy.
Unfortunately, “Blockchain Island” was almost too catchy. As I continued using those words, and in particular after my inaugural talk for the Blockchain Malta Association in November 2017, the phrase took on a life of its own.
The expression “Blockchain Island” started to acquire the same kind of valence as California’s Silicon Valley or Switzerland’s nascent Crypto Valley in Zug. It became an integral part of Malta’s branding and marketing exercise to launch itself as a major jurisdiction of choice for Crypto and Blockchain businesses.
Malta became THE Blockchain Island.
But in stressing the physicality of Malta, this branding missed the point. The Blockchain Island isn’t something to aspire to. It’s a vision to be achieved. Or a problem to be fixed, a constraint to be overcome by taking a bold leap into a fully virtual realm, unfettered by geography.
With that key distinction lost, the strategy began to unravel.
In retrospect, Malta’s prior success has worked against them, providing a clear template which they’ve been unable or unwilling to look beyond. In its previous endeavors, particularly iGaming, the country had already established a clear formula for success: create a favorable jurisdiction via new laws and regulations, and then use that to attract direct foreign investments, with companies required to set up operations on the ground. This last part is key: businesses practically need to be physically present in Malta, even though this isn’t logically or logistically necessary.
Ultimately, Malta stuck to this plan of requiring crypto and blockchain businesses to set up a physical presence on the ground. The idea of becoming a dominant player in the fully virtual crypto-sphere has been lost.
For now, this approach is succeeding. But for how long? Success has come at the high price of the island becoming increasingly overpopulated, with insufficient infrastructure, overheated property markets, and generally decreasing quality of life. Physical resources are strained: the very problem which shifting to services and the digital realm was supposed to solve.
It just doesn’t seem to be a sustainable proposition.
But there are other island nations existing in even more constrained circumstances than Malta. Enter the Republic of the Marshall Islands, who seem to understand the delicate interplay of the blockchain island concept as both problem and solution.
Another Island — and a Burning Platform
The Republic of the Marshall Islands (RMI) gained sovereignty in 1979. Since 1991 it has had a seat at the United Nations. In 2003 the United States renewed an agreement of financial assistance to the RMI, The Compact of Free Association (COFA).
The context of the COFA is complicated and storied. The US has strategic interests in the islands, and pays rent, so to say, to keep a portion of its anti-missile defense system there. The US had earlier, between 1946 and 1958, used the Bikini Atoll as a test ground for intensive nuclear test programs. It has since settled claims, paid damages and helped resettle people who lived in the atoll. Thanks to the COFA, the RMI uses the US dollar as their currency and their citizens can travel and live in the USA without a visa.
But this arrangement has always been temporary. COFA will end in 2023, and seemingly will not be renewed. COFA provides the equivalent of 30% of the country’s GDP. In short: disaster is looming.
And a Sinking Ship Too
And in more ways than one. It is hard to overstate how remote and fragile RMI is, geographically, economically and politically. Malta is an island, but you can still fly to mainland Europe in an hour. The Marshall Islands is 6 hours flight from Hawaii or 7 from Manila.
Malta is small, but RMI is minuscule: the capital Majuro is a 13 km2 strip of land surrounding a 300 km2 lagoon.
Malta is small, but it’s still an island of half a million people, a member of the EU with strong banking ties.
RMI has links to the US, but these are jeopardized. It has just one correspondent banking relationship, which is also under threat. It also isn’t just one island: it’s 1,500 different islands, with a combined population of just 70,000 people.
And an average elevation of just 2m.
The RMI are facing the prospect of losing 30% of their GDP, but this is nothing compared to the threat of being wiped from the map by rising sea levels.
Malta is an island, but RMI truly encapsulates the “blockchain island” problem: a situation of extreme isolation and an urgent need to forge connections — connections which are not rooted in the constraints of geography, space and physical resources.
The SOV as a New Form of “Crypto-FIAT-Currency”
In the face of these existential threats, the RMI government has decided to be bold: they’ve asserted their sovereign right to issue their own currency, the Marshallese sovereign (SOV).
The envisioned SOV currency will not simply be the digitization of an existing fiat currency, it will be a brand new currency. And not just that: it will be a completely new kind of fiat. A hybrid. SOV will be a crypto-fiat-currency (because it is based on crypto-technologies) that has legal tender status (because it is issued by a sovereign country).
SOV should not be considered as an alternative to the cryptocurrencies as we know them, but as a better alternative to existing fiat currencies, and as a new form of “crypto-fiat-currency.”
The SOV as a Bridge
By being both crypto and fiat, the SOV can effectively become the bridge that connects the mainland (the other fiat currencies) to the archipelago of cryptocurrencies.
It is in becoming this bridge that the SOV will bring about enormous value, connecting the wealth of the real world to the wonders of crypto-technologies. It is similar to the opening of the Panama canal or the Suez canal that set in motion entirely new and powerful economic drivers by connecting distant economic systems, and allow for new forms of exchanges to develop. There’s no danger of RMI falling into the same trap as Malta: the government isn’t hampered by an existing model, and the islands are too remote to insist on companies having a physical presence there. The government is delighted to embrace the virtual nature of the crypto-sphere.
The sheer volume of the real economy will provide the network effect that will bring crypto-technologies to the masses, through the SOV.
What the USD is for the global economy in the world, the SOV wants to be for the new crypto-economy in the crypto-sphere. This will provide extraordinary opportunities for the Marshall Islands, and play a vital role in fending off the pending financial and environmental crises.
But it also promises to be so much more.
My original idea, spurred by the blockchain island concept, wasn’t to create wealth out of thin air, but to look at the bigger picture. It wasn’t about creating prosperity for one nation, but having a greater impact on the world. It wasn’t just about the local and global economy, but also about social responsibility and even changing the very fabric of society with a deep concern about sustainability issues, social justice and distribution of wealth.
SOV promises to do all this, and more. Over the next series of articles, I’ll be exploring the wider implications of SOV as a crypto-fiat-currency, covering everything from how SOV provides a new template for marrying compliance and privacy to loftier concepts such as identity, global governance and sustainability.