Tiny Palau seeks to open the way through official cryptocurrency | Encryption

Palau has a population of approximately 18,000. When they think of a place at the forefront of technological innovation, they are unlikely to think of Palau first.

But this small Pacific island nation, about 900 kilometers (559 miles) west of the Philippines, is carrying out a bold mission to be the first to officially adopt and recognize cryptocurrencies.

In cooperation with the US cryptocurrency company Ripple, the island republic is exploring plans to launch the world’s first government-backed national stablecoin in the first half of 2022.

Although it runs on the same digital ledger technology or blockchain like other cryptocurrencies, the difference between stablecoins and other digital currencies is that their value is linked to real-world assets such as the U.S. dollar. For supporters of stablecoins, this gives digital currencies an advantage over well-known volatile cryptocurrencies such as Bitcoin. The price of Bitcoin has fluctuated between US$5,000 and US$65,000 in the past 20 months alone.

Palau President Surangel Whipps (Surangel Whipps, Jr) touted the use of stablecoins as a way to make citizens’ lives more convenient and diversify the economy. Before the pandemic, tourism accounted for about the country. Half of the gross product (GDP).

According to a report by the American Graduate School, Palau’s GDP shrank by 8.7% last year and is expected to shrink by 17.6% in 2021. This is mainly due to COVID-19 causes travel collapse.

In order to maintain its livelihood, the country received a US$25 million loan from the Asian Development Bank in April.

San Francisco-based Ripple has pledged to work with Palau to explore “a U.S. dollar-backed stablecoin”, cross-border payment strategies, and other features that use its XRP ledger (such as company registration).

At a media briefing last week, Whipps stated that he envisions citizens can use their mobile phones to buy goods in stores, and government employees can receive their wages immediately instead of waiting for several days in the bank for transactions.

“Why not make things so simple?” Whips told local reporters.

“Owning a digital currency in some ways can eliminate the need for banks,” he said. “You know, this makes everyone their own bank.”

Some advocates see digital currency as a way to empower people who cannot access banking services [File: Shannon Stapleton/ Reuters]

According to plans that are still in the early stages after the memorandum of understanding was signed last month, Palau’s digital currency will be backed by the U.S. dollar.

Palau is an independent country, but it relies on the United States for assistance and security under the Free Association Contract. It does not have its own currency or central bank, and uses the U.S. dollar as its official currency.

Nevertheless, there is still considerable ambiguity about what the Palau-Ripple partnership will produce-the Palau leader himself acknowledges this reality, and he describes the “first step” as “getting as much information as possible”. “Make a plan” to harness and take advantage of this. “

Ongerung Kambes Kesolei, editor of the Tia Belau newspaper, told Al Jazeera that although the idea of ​​emerging technologies may spark the interest of some people in the country, most people know little about how cryptocurrencies work.

“This is a highly volatile industry, but whether it will work, the jury is still there,” Kesolei said.

“There is a cryptocurrency market, but many countries in the world are still skeptical or wait-and-see. No country is fully committed. This shows that this economic sector is still in the early stages of development, so it cannot be said to work yet.”

Lord Fusitu’a, a voice cryptocurrency advocate in the Tonga Parliament of the Pacific island nation, told Al Jazeera that putting a country’s digital currency in the hands of private companies is dangerous.

Fusitu’a said: “The world’s first stablecoin is not an honor. I won’t brag about it, because you actually let your country be at the mercy of dollar inflation, but you didn’t get any benefits.”

“And you associate it with a digital currency owned by a private company, and the people of Palau did not vote for it. This is a private company, and a private company has only one function, and that is to make money for itself.”

Fusitu’a also questioned Ripple’s choice, and the US Securities and Exchange Commission has taken it to court on the grounds that the company is suspected of violating rules on unregistered securities transactions. Ripple denied the allegations made by the US Securities and Exchange Commission, saying that its digital currency is not a securities required by law.

“The reason it is considered a security is precisely because it is not a decentralized, distributed cryptocurrency like Bitcoin,” Fusitu’a said.

“The Nature of Money”

According to CoinGecko’s data, countries have adopted different approaches to the emergence of cryptocurrencies. The total value of cryptocurrencies last month exceeded US$3 trillion.

In September, El Salvador became the first country to start accepting Bitcoin as legal tender. Many other governments are skeptical of digital currencies, and countries including China, India, and Indonesia have implemented or considered bans.

Ross Barkley, a financial technology and digital currency expert at the University of New South Wales in Sydney, Australia, told Al Jazeera that although officially supported digital currencies may provide support for people in the Pacific region who cannot access banking services, its implementation faces many challenges.

Buckley said that despite years of research and planning, countries such as China, the United Kingdom, and Canada have not yet launched official digital currencies.

“This is a very complicated thing because it changes the fundamentals of the economy in quite profound ways,” he said, adding that it will be more difficult for a country without a central bank.

“It is almost difficult to understand what a country without a central bank would do, because this is a change in the nature of the currency.”

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