Yesterday, the International Monetary Fund (IMF) published a 58-page document in which it targets the Republic of Marshall Islands (RMI)- a small sovereign island-nation located in the Pacific Ocean. The report is mainly notifying the RMI not to release its native cryptocurrency – the Sovereign (SOV).
The Republic of Marshall Islands (RMI) received a warning from the International Monetary Fund (IMF) on 10 September regarding its plan to develop and launch a native cryptocurrency.
Back in February 2018, the RMI received approval for the “Declaration and Issuance of the Sovereign Currency Act 2018”, whose objective was to “to declare and issue a digital decentralized currency based on blockchain technology as legal tender”. According to the document, the new digital asset dubbed the Sovereign (SOV) is intended to be powered by the Ministry of Finance, which will also be responsible for announcing an Initial Coin Offering (ICO).
The use of Sovereign would be risky
From another perspective, the IMF believes that the use of a cryptocurrency as a “second form of legal tender” would be risky:
“The issuance of a decentralized digital currency as a second legal tender would increase macroeconomic and financial integrity risks, and elevate the risk of losing the last U.S. dollar correspondent banking relationship.”
The IMF made the following advice regarding the releasing of SOV tokens:
“The potential benefits from revenue gains appear considerably smaller than the potential costs arising from economic, reputational, AML/CFT, and governance risks. In the absence of adequate measures to mitigate them, the authorities should seriously reconsider the issuance of the digital currency as legal tender.”
Here are the main observations the report points out on the Marshall Islands’ Sovereign (SOV) token release:
- “RMI is vulnerable to climate change because of its low elevation, and it has experienced droughts and floods repeatedly.”
- “The economy is highly dependent on external aid, with annual grants averaging about 35 percent of GDP over the past decade.”
- “The country has one domestic commercial bank, Bank of Marshall Islands (BOMI), which is at risk of losing its last U.S. dollar correspondent banking relationship (CBR) with a U.S.-based bank as a result of heightened due diligence by banks in the United States.” The CBR is currently reviewed annually.
- “If RMI’s only domestic bank lost its last U.S. dollar CBR, external aid and other flows could be disrupted, which would result in a significant drag on the economy.”
- “A foreign private company—an Israel-based start-up with limited financial sector experience—will be in charge of the issuance and receive half of the initial SOV issuance.”
- “The authorities expect sizeable revenue gains from the other half of the SOV issuance, which would help prepare for the reduction of U.S. Compact grant after FY2023: 20 percent of the initial coins accruing to RMI will be distributed to the resident RMI citizens to jump-start the use of the SOV, while the rest of initial coins will be allocated to trust funds to supplement the current Compact Trust Fund, support citizens who were affected by the previous U.S. nuclear tests, and finance infrastructure projects.”
- “As a first step, a law was passed in February 2018 to recognize the SOV as second legal tender, signal the RMI’s strong commitment, and help the foreign private company secure the financing needed for the development of the technology for the new digital currency.”
- “Unless strong AML/CFT measures are implemented, the issuance of the SOV, as contemplated, will elevate the already high risks of losing the last U.S. dollar CBR.”
- “The law requires that all users of the SOV undergo standard “Know Your Customer (KYC)” procedures and that their identity be recorded on the blockchain.”
- “However, neither the content of the ‘standard KYC procedures,’ nor the modalities of their implementation have been established.”
- “In addition, other key measures such as transaction monitoring, reporting of suspicious transactions, compliance monitoring, and sanctioning of compliance failures are not addressed.”
- “… the issuance of the SOV without effective implementation of comprehensive AML/CFT measures could offset recent progress in strengthening the AML/CFT framework, leading to increased scrutiny from the AML/CFT standard setter and potential countermeasures, including, possibly, the immediate loss of the CBR.”
- “SOV issuance in the currently planned form and in the absence of a monetary policy framework could also result in monetary instability and pose significant challenges to macroeconomic management.”
- “The SOV will, by design, be an international currency and subject to large volatility in its exchange rates.”
“The SOV also raises cybersecurity and other operational risks. In the case of the SOV, these risks are compounded by 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.”
- “The limited telecommunication infrastructure in RMI will likely be an obstacle to the SOV becoming a widely used medium of exchange for some time.”
What do you think will be the Republic of Marshall Island (RMI)’s measures?
Author: Adriana Midrigan