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The Marshall Islands, officially the Republic of Marshall Islands (RMI), are a popular offshore center for many scams and fraud systems in the field of binary options and cryptocurrencies. Many warnings from financial market regulators are directed against companies that declare their registered office on the Marshall Islands. It was only in March 2018 that the country was removed from the European Union’s blacklist of tax havens. Most recently, RMI moved into the spotlight internationally because it passed the introduction of a blockchain-based cryptocurrency as legal tender by law. Now there is international turbulence around the project.

The sovereign Pacific state

The Marshall Islands are a sovereign state and a member of the UN. Until 1986, Marshall Islands was under US administration and is still a country associated with the United States. The last time the Pacific island came under discussion was of its plans to introduce a cryptocurrency as the legal tender beside the US dollar. The country with around 53,000 inhabitants stretches over 1,129 islands. The country’s economic situation is poor – according to the latest data, the unemployment rate is 36% – and the country is dependent on help from its ally the USA, which makes around USD 70 million in aid payments every year.

A token as legal tender

In February 2018, the parliament of Marshall Islands passed the Sovereign Currency Act 2018, the first decentralized cryptocurrency based on a blockchain implemented as legal tender of a sovereign state.

Hilda HEINE, President of Marshall Islands, supports and promotes the plan to introduce a blockchain-based cryptocurrency as legal tender. This new currency is called Sovereign (SOV) and is to be introduced with Israeli support as part of an ICO. The technical-organizational processing is to be carried out by the Israeli fintech start-up Neema, which was founded by the Israeli entrepreneur Barak BEN-EZER. The Israeli law firm Yigal Arnon & Co. will provide legal advice and design the regulatory framework.

The money supply approach

A total of 24 million SOVs are to be created and issued at the beginning, with each SOV, in turn, is divided into 100 sub-units. In total, 2.4 billion monetary units in the new monetary system of the Marshall Islands would be generated at the beginning.

SOV Token Distribution Pre-ICO
The initial token generation and distribution

50% or 12 million of the initially issued SOVs will be distributed to RMI. The remaining 50% will go to the Israeli startup Neema for the appointed organization to coordinate the ICO.

SOV Placement in the ICO
The SOV token distribution in the ICO

Of the 12 million SOV tokens distributed to RMI, 6 million are to be sold under the terms of the law as part of the subsequent ICO. Some specialized state trust funds will be set up to manage the money and/or tokens from the token issuance and ICO respectively. Through a Resident-Citizen SOV Allocation Fund, 2.4 million SOV are to be distributed to the resident citizens.

According to Milton FRIEDMAN’s best liberal understanding, the growth of the money supply is legally fixed at 4% p.a. and hence not subject to an active monetary policy. The growth of the money supply thus takes place algorithmically via the blockchain as prescribed by law. The dream of every crypto evangelist and every liberal money supply theorist.

The SOV should comply with the international AML guidelines and thus not be suitable for money laundering and criminal activities.

On the SOV website, you can read about the details of the SOV project.

A very controversial project

The RMI is a sovereign state and a member of the UN. In this respect, the introduction of the SOV has international repercussions despite the small size of the country and its economy. Accordingly, the introduction of SOV has been turbulent.

IMF warns RMI on its SOV plans
IMF warns RMI on its SOV plans

The International Monetary Fund (IMF) warned RMI about the project and pointed out, among other things, the “limited financial sector experience” of the Israeli start-up. In September 2018, the IMF called on the Marshall Islands to reconsider the plan critically and to describe it more or less as foolhardy. The SOV issuance “in the absence of a monetary policy framework could also result in monetary instability and pose significant challenges to macroeconomic management“. The challenges would be amplified by the planned distribution of SOVs to citizens, which would be equivalent to a monetary expansion through “helicopter money.” Finally, the fact that the development and management of the SOV protocol are outside of the authorities’ control and in the hands of a foreign private company would expose RMI to considerable cybersecurity threats.

Some senators in Parliament moved to pass a vote of no confidence in HEINE, the first female leader of any Pacific Island. The vote is scheduled to take place on November 12, 2018. But the president stands by her plan. The criticism would be driven by foreign interests, especially the Chinese, she argued. The discussion about the introduction of SOV can also be followed in the telegram channel of the project.

The Israeli interests

From the outside, even after studying the documents, it is difficult to understand why the introduction and operation of a distributed legal tender of a sovereign state in the Pacific are put in the hands of an Israeli start-up. In the absence of a central bank, this start-up actually could take on the role of a central authority for RMI’s new monetary system.

Neema receives 50% of the issued SOVs and thus has a massive influence on the monetary system and its stability. One could argue that the use of Israeli support was a wise political move. As a close US ally, Israel has a strong voice in Washington and so far no public criticism of the introduction of the SOV has been heard from there. This was quite different in the case of Venezuela, where the introduction of the cryptographic PETRO prompted Donald TRUMP to issue an executive order banning US citizens from investing in PETRO.

Section 1. (a) All transactions related to, provision of financing for, and other dealings in, by a United States person or within the United States, any digital currency, digital coin, or digital token, that was issued by, for, or on behalf of the Government of Venezuela on or after January 9, 2018, are prohibited as of the effective date of this order.

Sure, RMI is not a US enemy but an ally. And it’s a small nation. Nevertheless, this combination of decentralized legal tender without a central authority but with a private start-up in a foreign country acting as a sort of central authority is also the main point of criticism that our FinTelegram team has of the SOV project. Besides these big points or red flags, we find the idea itself as well as the money theory behind it attractive out and in principle worth implementing. The success of this ambitious project, however, will depend on the U.S guys. As the IMF pointed out, the RMI’s only domestic commercial bank is at risk of losing its last U.S. dollar correspondent banking relationship with a U.S.-based bank as a result of heightened due diligence by banks in the U.S. because of the SOV project.

That said, the fact that the Marshall Islands has a small and manageable economy, would make the SOV a kind of laboratory project for a future crypto-economy.

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