One of the world’s smallest nations hopes to launch the first government-backed national stablecoin in 2022.
Palau, population approximately 18,000, is unlikely to be at the top of many people’s minds when they think of places at the forefront of technological innovation.
But the tiny Pacific island nation, located about 900 km (559 miles) west of the Philippines, is on a bold mission to lead the official adoption and endorsement of cryptocurrencies.
As part of a partnership with Ripple, the US-based cryptocurrency company, Palau is exploring plans to launch the world’s first government-backed stable national currency in the first half of 2022.
Linked to a real world currency
While operating on the same digital ratio or Blockchain technology as other cryptocurrencies, stablecoins differ from other digital currencies in that they have their values tied to a real-world asset such as the US dollar. For stablecoin proponents, this gives digital coins an edge over notoriously volatile crypto’s like Bitcoin, whose price has fluctuated between $5,000 and $65,000 in just the past 20 months.
Palau President Surangel Whipps, Jr., praised the adoption of a stable currency as a way to make life more convenient for citizens and diversify the economy away from tourism, which before the pandemic accounted for about half of the gross domestic product (GDP ).
Palau’s GDP shrank 8.7 percent last year, with a further 17.6 percent contraction expected in 2021, according to a Graduate School USA report, largely due to travel collapse due to COVID-19.
In April, the Asian Development Bank granted the country a $25 million loan to keep it afloat.
San Francisco-based Ripple has pledged to work with Palau to explore “a stablecoin backed in US dollars”, international payment strategies and other features using its XRP Ledger as a corporate registry.
At a press conference last week, Whipps said he expects citizens to buy goods in stores with their phones and government officials to receive their salaries instantly, rather than waiting days for the transaction at their bank.
Why not make it that simple? Having a digital currency somehow eliminates the need for a bank, it makes everyone have their own bank.
At the mercy of US dollar inflation
Under the plans, which remain in the initial stages after signing a memorandum of understanding last month, Palau’s digital currency would be backed by the US dollar.
Palau, which is an independent country but depends on the US for help and security under a Free Association Pact, does not have its own currency or central bank and uses the US dollar as its official currency.
Still, there is considerable ambiguity about what will result from Palau’s partnership with Ripple, a reality recognized by the Palau leader himself, who described the “first step” as getting “as much information as possible” to “come up with a plan to leverage and make use of it”.
Ongerung Kambes Kesolei, editor of Tia Belau newspaper, told Al Jazeera that while the idea of emerging technologies might excite some people in the country, most had no idea how cryptocurrency worked.
It’s a highly volatile industry, but if it would work, the jury hasn’t decided yet.
There is a market for cryptocurrencies, but still, many countries around the world are skeptical or in a wait-and-see attitude. No country is fully plunging, which shows that this economic sector is still in its early stages of development, so saying it would work cannot be said right now.
Lord Fusitu’a, a cryptocurrency advocate who sits in parliament on the Pacific island of Tonga, told Al Jazeera that there was a danger of putting a country’s digital currency in the hands of a private company.
As Fusitu’a said:
The world’s first stablecoin is not an honor, I wouldn’t brag about it because you are effectively putting your country at the mercy of US dollar inflation, but not getting any of its benefits.
And you’re tying this to a digital currency that’s owned by a private company, which the people of Palau didn’t vote for. This is a private company, and private companies have only one function, which is to make a profit for themselves.
Fusitu’a also questioned Ripple’s choice, which the US Securities and Exchange Commission took to court for alleged violation of rules against trading in unregistered securities. Ripple has denied the SEC’s allegations, arguing that its digital currencies are not securities under the law.
The reason it is considered a security is precisely because it is not a distributed and decentralized cryptocurrency like Bitcoin.