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.
Last time, I explained why SOV will offer a better form of fiat than conventional fiat like the US dollar. But a hybrid crypto-fiat-currency like SOV can offer so much more.
There is a huge systemic need to legitimize cryptocurrencies, not only because of the network effects of the existing billions of conventional fiat accounts controlled by people, but also because of the oncoming wave of potentially hundreds of billions of interconnected devices in the Internet of Things. These devices will need the ability to offer, negotiate, consume and pay for services among themselves, all at razor-thin margins, something which current infrastructure cannot provide.
A Vision of the Future
In a characteristically bizarre and bombastic speech at the UN last week, British Prime Minister Boris Johnson laid out a vision of the future.
Smart cities will pullulate with sensors, all joined together by the Internet of Things, bollards communing invisibly with lamp posts. […] In the future, voice connectivity will be in every room and almost every object: your mattress will monitor your nightmares; your fridge will beep for more cheese, your front door will sweep wide the moment you approach, like some silent butler; your smart meter will go hustling […] for the cheapest electricity.
And every one of them minutely transcribing your every habit in tiny electronic shorthand. Stored not in their chips or their innards – nowhere you can find it, but in some great cloud of data[.]
Johnson’s speech veered wildly between misplaced AI panic and obscure Classical references, and many in the crypto community will be understandably doubtful that the leader of one of the Five Eyes surveillance nations is sincere in condemning the threat of digital authoritarianism. But his description of the looming Internet of Things, for all its ludicrous imagery, is broadly accurate.
Industry has a trillion dollar stake in making the Internet of Things and the Economy of Things a reality, and quickly. But there’s a problem.
With potentially hundreds of billions of autonomous and semi-autonomous devices as part of the Economy of Things, the existing payment infrastructure will not be able to handle the sheer volume and frequency of tiny microtransactions. Even if this technical hurdle could be resolved within the existing real-economy infrastructure, microtransactions would still not be a viable economic proposition, because the transaction fees would be higher than the (micro)transaction values.
The development of the Internet of Things will require the presence of pervasive blockchain infrastructure not only to handle the Identity of Things but also to allow these things to become autonomous economic actors, all while interacting with real people, and probably paying taxes, insurance and licensing fees too. (This is, by the way, one of the reasons why there is pressure in Malta to ascribe legal personality to autonomous technologies.)
The real-economy is heavily invested in the Internet of Things becoming viable, and soon. But, paradoxically, it’s the current set of rules of the real-economy which is holding things back.
The only way the Internet of Things can be technically and economically viable is with a global blockchain infrastructure upon which microtransactions can be performed and recorded. This obviously requires legitimized cryptocurrencies.
As autonomous things are likely to traverse not only organizational boundaries, but also jurisdictional boundaries, the transactions among them are better handled by a global currency, rather than having to deal with currency exchange rates —possibly multiple exchange rates per transaction — which again would render microtransactions uneconomical.
And it gets worse. If it is already impossible for regulators to accept anonymous transactions between people, it will be even less acceptable to do so for anonymous transactions between autonomous things which might even belong to some decentralized autonomous entity on a global blockchain, possibly roaming across jurisdictional boundaries as well.
If we want to have legal recourse against such autonomous entities, their funds must be made available to law enforcement. Choice of jurisdiction and applicable rule of law must be declared (and accepted) just like they are for any citizen of any legitimate jurisdiction. These entities must be the legitimate and identified owners of their patrimony, which would be target of recourse if need be.
Furthermore, if we want autonomous entities to be liable for their actions, then they need to be identified first. The Identity of Things becomes an essential part of the equation of recognizing legal personality to such things; but the Identity of Things requires the same kind of crypto-technology infrastructure that underpins cryptocurrencies.
Note that crypto-technologies including smart contracts on public open blockchains, cannot function without “gas” – in order to avoid the “halting problem.” But “gas” is just another name for a cryptocurrency. (The situation is as paradoxical as thinking that current computer programs were illegal to execute, because they would be consuming some kind of illegal electricity. Such electricity/gas must be made legal for the technology to flourish!)
With self-sovereign identity and/or data (both for people and/or things), we will also start seeing markets develop with transactions based around such identity/data. These transactions will also need to be paid for in a cryptocurrency, rather than dollars and cents.
All the above make the use case for a legitimate cryptocurrency as a critical aspect for the future unhindered development and adoption of all of these technologies (cryptocurrencies, blockchains, smart contracts, Internet of Things, DAOs, self-sovereign identity/data, etc.). Incidentally, these are the technologies that in the Maltese laws have collectively been called Innovative Technology Arrangements.
There is no way to square this circle beyond creating a legitimate cryptocurrency.
The SOV as the First Globally Legitimate Crypto-fiat-currency
The SOV is issued by the RMI as legal tender, and it takes the material form of a crypto currency because it is built on top of crypto-technologies. This makes it well-equipped to handle the innovative technology arrangements required by the Internet of Things, at costs which make microtransactions economically viable.
At the same time, the SOV’s in-built KYC/AML/CFT compliance should more than satisfy regulatory concerns.
While any crypto-exchange onboarding procedure will obviously require strict and mandatory due diligence as per FATF recommendations, the novelty here is that the requirement can be enforced by the software code that intrinsically defines the SOV protocol and token itself.
“Code is Law” Redefined
All of this brings a new sense to the idiom that “Code is Law” because in this instance the intent of the code is truly that of not only “being” the law, but also that of actually enforcing the law, with no exception. The legitimacy of the code stems from the legitimacy of the law. It is hard to see what regulators could object to here, especially as the SOV will be the currency of a sovereign nation in good standing with the UN, not a global corporation able to dodge and weave between favourable an opaque jurisdictions.
Stil, for some, all this talk of automated compliance might seem like an optimistic and euphemistic version of the authoritarian surveillance nightmare alluded to in the UK Prime Minister’s speech.
There is a risk of going down a very slippery slope when deploying this kind of technology. The SOV must not become a tool of oppression and given even more surveillance capacity to the powers that be, just with the excuse of having to be compliant with existing laws to catch the bad guys. The stakes are too high. We must not concede to the flimsy argument that those who have nothing to hide have nothing to fear.
Strong privacy must be preserved and guaranteed at all costs. But I believe the Marshallese sovereign also offers a best-case scenario for balancing individual privacy with the need for transparency and accountability. I’ll explain how and why in the penultimate article in this series.