We have mentioned in previous posts that no country yet recognizes cryptocurrency as legal tender. Where crypto payments are allowed by law, platforms like Bitcoin are viewed as payment systems rather than legal tender on the same plane as fiat. That is going to change in the very near future thanks to a plan put in place on the Marshall Islands.
The Republic of the Marshall Islands announced in late January 2019 a plan to create a digital alternative to the U.S. dollar - its current fiat - known as the Sovereign (SOV). Once issued, the digital currency will be considered legal tender. What makes the plan so interesting is that the Marshall Islands government has contracted with a Swiss company to create actual physical notes representing SOV.
The notes will not be the same as U.S. dollar bills, as that would defeat the purpose. But they will perform an important function. The notes will effectively be physical digital wallets that Marshall Islands residents will be able to use to pay for virtually anything they would normally spend dollars on.
An alternative legal tender
Marshall Islands government officials explain the plan as a means of bringing alternative legal tender to island residents. To hear them describe it, it appears as though residents of some islands have difficulty accessing fiat. That makes sense given the fact that the Marshall Islands are a remote island chain in the middle of the Pacific, very near the equator.
Not having access to U.S. dollars may not have been such a big deal before the advent of the internet. But with so much commerce now taking place online, citizens without access to U.S. dollars find it nearly impossible to do business beyond the confines of their own shores. The SOV will give them equal access to the entire Marshall Islands economy. View the Press Release.
Using the notes
So, how will the state-issued notes work? According to news reports, the notes will be 'physical blockchain notes' with embedded blockchain-enabled microprocessors. Each issued note will be a digital wallet that stores SOV currency and its associated information.
To use a note, the holder would simply present it to a merchant at the time of purchase. The merchant could insert the note into a machine, or possibly just tap it, to facilitate the transaction. Computer software would read the information on the note, withdraw the digital currency, and update the note's records automatically. Then the note would be given back to the customer.
The most brilliant part of the system is that no internet connection is necessary to make it work. Each note's individual microprocessor manages its embedded information without any need to go online. This opens the door to all sorts of possibilities.
For example, being able to use the note to make payment at a local merchant should also mean that it could be used to withdraw digital tokens at an ATM. Just tap the note, enter the amount to be withdrawn, and away you go. It seems pretty simple.
On the other hand, it also opens the door to theft. Having a physical note is no different than carrying a wallet full of U.S. dollars. Anyone who steals an SOV note would ostensibly be able to take control of all of the digital coins it contains.
A controllable digital currency
Asked about their plans for SOV moving forward, Marshall Islands officials are not quick to reveal any details. They will say that SOV is a "controllable mechanism of currency issuance in circulation for the state." Translate that into every day English and it simply means that the government intends to control SOV just the same way the U.S. controls dollars. That makes Sovereign a centralized currency in every respect.
Does this mean the demise of the U.S. dollar in the Marshall Islands? Not by a long shot. The dollar is still the world's base currency. Any attempt by the Marshall Islands to do away with it would be disastrous for its economy. No, SOV is more about leveling the economic playing field by creating a national currency. It just so happens that the national currency is digital.
The introduction of SOV will give access to payments to every island citizen who wants that access. It will allow for local exchange of cryptocurrency without the need for global exchanges and big names like Bitcoin and Litecoin. SOV might even facilitate economic activity among groups of citizens who would otherwise not think about doing business outside their local communities.
The Marshall Islands cautioned
As good as the idea of an alternative legal tender sounds to Marshall Islands officials, the nation was cautioned when it first announced its plan in 2018. For example, the International Monetary Fund (IMF) claimed that carrying through on the plan would put a significant drag on the nation's economy. IMF regulators specifically warned of an interruption in the flow of international aid.
Though the IMF did not specifically come out and state as such, their warnings sounded a lot like an angry child who takes his ball and goes home. In essence, the IMF suggested that other countries would not assist the Marshall Islands with financial aid if they follow through. And among those that do continue financial aid, that aid still might be limited.
If that is the case, don't tell Tangem. As the company tasked with actually making the physical notes for the Marshall Islands, they plan to pitch the notes to other governments considering similar plans. The company just received some USD $15 million in investment funding from Japanese investors, signaling a belief in the potential of what Tangem is doing.
Spending SOV off the islands
As Coinbet.com is a website primarily devoted to crypto gambling, we always try to explain how the news stories we report might affect our readers. The question in this case is how useful SOV will be off the Marshall Islands. In other words, could Marshall Islands residents use the digital token to play e.g. MegaMoolah.com online?
Directly, no. It is unlikely that any online casino currently accepting Bitcoin, Ethereum, Monero, etc. would also accept Sovereign. But it seems that Marshall Islands residents could exchange SOV for U.S. dollars, especially given that SOV will be recognized as an alternative legal tender. Those U.S. dollars could then be converted into bitcoins for online gambling purposes.
Converting twice seems like a roundabout way to do things for sure. But as long as there are thousands of cryptocurrencies to work with, that is the way it will have to be. It is not reasonable to expect vendors to accept thousands of different digital coins. At the same time, there really is no desire within the cryptocurrency community to consolidate everything under a single coin. Doing so would pretty much negate the purpose for having cryptocurrencies.
The future of alternate legal tenders
The most interesting aspect of the Marshall Islands plan is the designation of their digital currency as an alternative legal tender. There are other countries entertaining the idea of issuing state-backed and controlled digital currencies, but the Marshall Islands is the first we have heard of to go the legal tender route. Why does this matter?
By its nature, legal tender is a legally recognized means of paying debts. This has an especially important practical implication. We can compare it to the pound for illustrative purposes.
Let's say you go into a UK restaurant in search of fish and chips. You can legally pay your debt in pounds because it is considered legal tender. That restaurant could not refuse your pounds and, instead, force you to pay with live chickens. If you offer pounds, they are obligated to accept them.
Another thing to consider about legal tender is that it erases indebtedness upon its acceptance. If you owe £100 to a merchant and pay with physical banknotes, your indebtedness is immediately settled when those banknotes are accepted. The same is not true if you were to pay with a credit card, debit card, or even personal check. Your debt is not settled until fiat actually changes hands.
The practical aspects of this in terms of SOV are historic. For the first time in history, there will be a digital currency that can act just like the U.S. dollar to settle indebtedness. Pay a debt with SOV in the Marshall Islands and that debt is officially cleared.
Paving the way for all digital
Those of us involved in the cryptocurrency space are back and forth as to whether or not hard currency will ever be replaced by all-digital alternatives. On one hand, it is tough to get people to give up on hard currency because it acts as a tangible representation of a physical ownership of value. People see a loss of hard currency as a loss of value.
On the other hand, supplying consumers with a physical note that represents the value of their crypto holdings solves that problem by providing something tangible. We could easily see SOV paving the way for future digital currencies that completely eliminate the need for hard cash. Maybe some of those digital currencies will be fiat replacements; others might simply be digital representations of an existing fiat.