Facing climate change-induced sea level rise and an impending end to U.S. reparations, the tiny Republic of the Marshall Islands in the Pacific Ocean announced this week it would raise money by issuing its own cryptocurrency.
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Other countries, like Venezuela, are seeking to bolster their budgets with crypto offerings, but the Marshall Islands is the first to pass a law authorizing the use of a digital coin as official legal tender in the country. The country currently uses the U.S. dollar.
The new token will be call Sovereign, or SOV for short.
An Israel-based money transfer startup called Neema is in charge of developing the necessary digital infrastructure ahead of the initial coin offering that is expected to happen later this year. The company has also pledged to provide universal internet access that is a prerequisite for the widespread adoption of the digital currency across the many populated islands and islets that make up the country.
The Marshall Islands are aiming to raise “hundreds of millions of dollars” with the sale of Sovereign (SOV), said Neema’s founder and chief executive, Barak Ben-Ezer, in an interview with Calcalist on Wednesday.
The Marshall Islands, home to roughly 70,000 people, were used as the test grounds for U.S. nuclear weapons in the 1940s and ‘50s. The U.S. pays the islanders $30 million a year as compensation, providing a significant portion of the country’s budget. That arrangement is set to sunset in 2023.
The Marshall Islands plans to use the 70% of its proceeds from the crypto offering to offset the budget shortfall and also to pay for the lingering public health costs associated with the nuclear tests. 10% will go toward sustainability and the rest will be distributed directly to citizens.
“Allocating SOV units directly to the citizens will circulate the currency and distribute wealth efficiently to our people,” Marshall Islands President Hilda Heine said in a statement. “In addition, (the Marshall Islands) will invest the revenues to support its climate change efforts, green energy, healthcare for those still affected by the US nuclear tests, and education.”
The public ledger that will track SOV is called Yokwe and it was designed to address the problem of anonymity that makes many financial institutions reticent to deal with bitcoin, ether and other cryptocurrencies. With Yokwe, all accounts are required to be linked to real identities that are verified by the government, but the identities remain encrypted and private.
“The Yokwe protocol provides a promising balance between transparency and privacy and we’re excited to develop it further,” Peter Dittus, an economist advising Neema, said in a statement. Mr. Dittus is the former secretary general of Bank for International Settlements, a financial institution organized by 60 of the world’s central banks.
A long-time investor in and promoter of crypto, Mr. Ben-Ezer said he approached the Marshall Islands about a partnership because he thought the biggest obstacle to mainstream adoption has been legal murkiness around the crypto.
“There is one problem with crypto—it’s legal status had not been defined,” he said, giving the example of how the U.S. Internal Revenue Service treats crypto as an investment that can be taxed for capital gains rather than as currency.
Mr. Ben-Ezer paid close attention when the IRS said it defines a currency as the legal tender of a sovereign country. He drafted a list of small countries that don’t have their own currency, eventually deciding on the Marshall Islands because of its democratic rule and strong ties to the United States. In January, Neema hired Roye Rahav, whose father, Rani Rahav, is the Marshall Islands’ honorary consul in Israel.
Half of the 24 million units of Sovereign that will be issued will go to Neema, Mr. Ben-Ezer said. Some of the tokens will go to the company’s executives and the rest will pay for the development of the cryptocurrency's physical and digital infrastructure.