Welcome back to my article series exploring the potential of the Marshallese sovereign (SOV), the new hybrid crypto-fiat-currency which is being issued by the Republic of the Marshall Islands.
In the first part, I suggested that SOV as a hybrid crypto-fiat-currency could be the fastest and simplest way to bridge the divide between the Blockchain Island and the real-economy mainland. But “fastest and simplest” isn’t always the same as “best”, and some might argue that the Blockchain Island shouldn’t be connected to the real-economy mainland at all, or at least not for many years. In addition, crypto enthusiasts might worry that a legitimized currency such as SOV could, instead of acting as a bridge, prevent “true” cryptocurrencies from ever becoming mainstream at all.
But SOV is not an alternative to cryptocurrencies such as bitcoin. A currency such as SOV is indeed the best approach to building this bridge, because it represents the quickest and easiest way to address establishment concerns. In fact, it will do a better job of meeting regulators’ concerns than any current approach, so it will remove any wiggle room if those concerns turn out to be less than sincere. In short: SOV will be better fiat than existing fiat, in addition to (and in part because of) its advantages of being a cryptocurrency.
Let me explain why.
Why the SOV approach can work
Why should we expect SOV to succeed in forging a connection to the real-economy mainland when other cryptocurrencies have failed? Recently Libra — probably the most well-known attempt to create a legitimized cryptocurrency — received a firm rebuke from the French Minister of the Economy and Finance, Bruno Le Maire, who said:
We cannot authorize the development of Libra on European soil. […] The monetary sovereignty of countries is at stake from a possible privatization of money […] by a sole actor with more than 2 billion users on the planet.
The key point here is Le Maire’s concern about monetary sovereignty. The implication is that corporate cryptocurrencies are a problem, but sovereign cryptocurrencies would not be. RMI has no currency of its own (as it has used the USD until now). However, as a sovereign nation it has the right to issue a sovereign currency. So in addition to having all the beneficial properties of cryptocurrencies, SOV is also clearly and unambiguously the legal tender of the Marshall Islands. This is crucial.
Joining the Blockchain Island to the mainland is hard because the real economy is tied to the fiat, legal tender, currencies of various sovereign jurisdictions. Regular cryptocurrencies like Bitcoin have none of these properties.
SOV’s legal tender status is a key distinction from Libra or Bitcoin, or any other cryptocurrency which exists today (we’ll disregard the Venezuelan Petro based on this last point — it clearly doesn’t exist).
Invoices must be paid via legal tender fiat by law; likewise, taxes and dues must be paid by fiat and the relevant jurisdiction must accept tax payments in that form; social benefits must be disbursed in fiat; public tender awards must be in fiat. It is unreasonable to expect that this will change any time soon, in any jurisdiction.
In virtue of its legal tender status, the SOV can function as required for the payment of invoices, taxes, dues, social benefits, etc. all the while it can have all the features of a crypto-currency. In virtue of its legal tender status, foreign exchanges and the banks all over the world will have no barriers to accepting it.
As Peter Dittus, Former Secretary General of the Bank for International Settlements and economic advisor for SOV has explained:
[…] the laws and regulations that map out how to treat foreign exchange in each jurisdiction would be directly applicable. This would create legal certainty for banks and other economic agents.
A sovereign crypto-fiat-currency like SOV is the quickest and simplest way to bridge the divide between the Blockchain Island and the real economy mainland. It’s also far better than any of the alternatives.
SOV is better than Central Bank Digital Currencies
There have been many discussions about using central bank digital currencies (CBDCs) for both retail and wholesale applications. But the only practical difference between CBDCs and today’s solutions is where the electronic account is kept with a Central Bank, rather than with your own bank of choice.
Central banks would have to manage deposited currency accounts held by the general public. In addition to this extra administrative burden, it also risks putting ordinary banks — especially retail banks — out of business. This is hardly a welcome proposition for central banks.
SOV is better than Central Bank Cryptocurrencies
Several people have proposed the idea of central bank cryptocurrencies (CBCCs). CBCCs are in principle very close to what SOV could become, but with some inherent constraints that central banks would definitely want to impose. Unlike cryptocurrencies, which are typically mined or minted by network participants, CBCCs would be issued the central bank itself. CBCC units would be created or destroyed in inverse quantity to some cash or reserve, in order to keep the money supply unchanged. Thus monetary policies would still be the realm of the institution and at the discretion of powerful individuals.
Although SOV will be issued by the Marshallese government, it is certainly not a CBCC. The SOV will invite broader network participation in validating the chain and receiving new SOV. More importantly, the rules of issuance are embedded into the protocol and algorithmically enforced.
As stated in the SOV white paper, SOV will employ Milton Friednman’s k-percent rule to algorithmically fix money supply growth at 4% per year. This is far more likely to promote stability than the subjective and discretionary interpretation of central bankers, and it would be the first fiat currently to effectively address the issue of fractional banking.
Furthermore — and this is critical — since central banks are concerned exclusively with monetary policy issues, neither CBDCs nor CBCCs would be equipped to support the upcoming revolution brought about by the Internet of Things, which will require support for decentralized computation (smart contracts) and self-sovereign identity. This is a huge topic, and will be the focus of the next part of this article series.
SOV is better than Private Sector Coins
I’ve already mentioned Facebook’s Libra coin as the most advanced attempt at a global private sector coin, but it’s hardly unique. The world’s five biggest tech companies — Google, Apple, Facebook, Amazon and Microsoft (“GAFAM”) — all seem to have plans to issue their own cryptocurrencies.
But resistance is widespread, both among the establishment and the cryptosphere, and with good reason.
The establishment concern is that if Libra or something like it were to gain substantial traction, it would impact many national currencies. It would become a trailblazer for the emergence of a global private sector cryptocurrency that could compete in volume with national currencies, to the point that central banks’ monetary policies could become seriously affected, disrupted and even rendered ineffective.
For true cryptocurrency supporters, the major risk of any sort of global private sector coin is that it would perpetuate and entrench surveillance capitalism to unacceptable degrees. Why would anyone want the world’s economy to be controlled by a handful of people in charge of these companies? With the potential to not only influence the flow of biased information, but even to subvert and prevent legitimate economic transactions.
A sovereign cryptocurrency like the SOV, created to improve the fortunes of a small nation and its citizenry rather than to appease shareholders, would have broader public support and offers greater guarantees and protection for the general public. I’ll be returning to the problems of identity and the balance between privacy and oversight in a later article.
SOV is better than the USD and all other Conventional Fiat Currencies
I’ve explained how SOV is a better approach to digital currencies than any of the alternatives proposed by the establishment. To which the response might be “Fine, we’ll just stick with what we’ve got.” But even from that myopic viewpoint, SOV is essential, because SOV will be a better fiat currency than conventional fiat like the US dollar.
Regulators all over the world are concerned about illicit use of money in general and of cryptocurrencies in particular. This may seem like a reasonable concern, but it is hard to ignore the retort from the crypto-archipelago: the preferred currency for criminal activities is actually the US dollar. Bitcoin in particular would be a spectacularly bad choice for trying to commit a crime, as witnessed by the ease with which the IRS has been able to track down Bitcoin users via social mining. If people are using Bitcoin for illicit purposes, it’s because clumsy regulation makes it hard to catch and prosecute people, not because the technology affords any kind of useful anonymity when weighed against the combine surveillance might of the world’s intelligence services.
So let’s address this straight on.
Cash is truly anonymous. A digital currency that automatically enforced regulations and laws would obviously much harder to use for criminal purposes. This is what SOV offers, with full KYC, AML, CFT and FATF compliance baked in at the protocol level.
If regulators were sincere about their declared intent of preventing criminal activities, they would have a strong reason not only to adopt this new kind of currency but actually to ban the USD and all existing form of fiat currencies through which the majority of crimes are committed. A crypto-fiat-currency like SOV would be far easier to regulate and police.
If regulators are hesitant to support SOV and insist on supporting conventional fiat currencies, it would be reasonable to wonder why they choose to remain complicit in defending old-fashioned forms of money that clearly do not prevent criminal activities.
Note that true cryptocurrencies designed for anonymity like Monero and Z-Cash will always remain beyond the reach of law enforcement. Any lawmaker that believes otherwise needs urgently to be educated about the basics of the mathematics of cryptography and distributed/decentralized consensus protocols. At the same time it is extremely unlikely that such cryptocurrencies will ever become mainstream, precisely because they are disconnected from the real economy.
Of course in such a scenario regulators would still desire to ban true cryptocurrencies as well, but the crucial difference is that banning the USD and other conventional fiat currencies actually falls under their remit, because conventional fiat currencies are under clear jurisdictional control while true cryptocurrencies do not.
SOV is NOT an Alternative to the Bitcoin or other Cryptocurrencies
If SOV is so much better than the alternatives, should we worry that it won’t act as a bridge to the Blockchain Island at all? Not at all.
SOV or any other crypto-fiat-currency is obviously not a cryptocurrency in the “conventional” sense intended by the cypherpunk movement (along with all crypto-anarchists, extreme libertarians, etc.), because it will not fully support the five pillars of an open cryptocurrency, frequently referred to by A. Antonopoulos, which state that a true cryptocurrency must be: (1) open; (2) public; (3) neutral; (4) borderless; and (5) censorship resistant.
Because it intends to be legitimized and lawful, SOV does not fully meet any of these criteria (although it does partially meet all of them, which is more than can be said for any of the alternatives mentioned earlier in the article).
The SOV is not designed as an alternative to bitcoin and the other islands of the crypto-archipelago, although it is the best chance at providing them with a bridge to legitimacy. No, it is intended to provide a better USD than the USD (or any other conventional fiat currency, for that matter), by ensuring that problems related to identity and source of funds would be addressed intrinsically by the technology itself.
This is entirely in line with the viewpoint expressed on November 18, 2018, by Christine Lagarde, Managing Director of the IMF:
[…] identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank, and marketers would not know who I am. The state might not either, at least by default. Anti-money laundering and terrorist financing controls would nevertheless run in the background. If a suspicion arose it would be possible to lift the veil of anonymity and investigate. This setup would be good for users, bad for criminals, and better for the state, relative to cash.Source: https://www.imf.org/en/News/Articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency
The SOV intends to be better than any conventional fiat currency while not only building a bridge to the crypto archipelago, but also making the promised benefits of crypto-technologies and blockchain technologies widely and readily accessible for the global real-economy, and enabling the economy of autonomous things, and decentralized entities. This is something which the bills and coins of conventional fiat simply cannot do, even when stored electronically in databases. In the next part of this series, we’ll investigate why SOV is perfectly positioned to support the coming revolution of the Internet of Things.