Over the years, hype surrounding e-payment systems made utility tokens look like national currencies. News swept the media that countries like Tunisia and Senegal were putting their currencies on the blockchain. It wasn’t true.
In 2018, however, the first nationally-backed cryptocurrency projects arrived. Venezuela’s dodgy petro, the Republic of the Marshall Islands’ uncertain sovereign, and an Iranian project are the first government-supported attempts to move fiat onto a distributed ledger.
CoinIQ’s Sovereign Cryptocurrency Guide will help you understand how the real national crypto projects work (or don’t work). We’ll also dispel some of the myths surrounding projects that were never nationally-backed or even based on blockchains.
What Are Sovereign Cryptocurrencies?
Central banks are the only institutions that can issue national currencies. In the same way, only a central bank can create a sovereign cryptocurrency.
As we’ll see later, state-owned companies have created electronic payment systems which some interpreted as national currencies. Without central bank involvement, however, these are simply utility tokens.
Although each country is different, central banks manage the monetary supply, set interest rates and regulate the banking system. In the same way, a central bank would control the tokens in circulation, regulate supply, and decide whether privacy is an option.
Of course, that raises the question of whether a centrally-managed cryptocurrency is really a cryptocurrency at all.
Real Sovereign Cryptocurrencies
Only a handful of projects around the world are actually trying to establish a national digital currency based on blockchain technology.
In the closing weeks of 2017, Venezuelan President Nicolas Maduro announced the petro, a national cryptocurrency. The new currency, Reuters reported Maduro saying, would “advance [Venezuela] in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade.”
Little more was known until two months later, when Venezuela launched the pre-sale. Even then, the white paper and other documents prompted more confusion. When Ars Technica downloaded the white paper, it said the petro would be an ERC20 token on the Ethereum blockchain. “But by Wednesday afternoon,” Ars Technica reported, “all mentions of ERC20 had been scrubbed from the white paper.”
The new version said the petro would run on the NEM blockchain. The NEM Foundation later refuted media claims of its direct involvement.
Off-limits to Americans
The United States quickly isolated the project. In a January statement to Reuters, a US Treasury Department spokesman warned that “The petro digital currency would appear to be an extension of credit to the Venezuelan government … (and) could therefore expose U.S. persons to legal risk.”
President Trump confirmed that in March with an executive order explicitly folding the Petro into America’s sanctions regime.
A Time investigation found that many of the people developing the petro have strong ties to the Kremlin. Vladimir Putin wanted to use cryptocurrency to undermine the US dollar’s dominance. A Kremlin economic advisor Igor Shuvalov told Time that a Russia-issued cryptocurrency “was too dangerous.” They looked to Venezuela instead. “Venezuela has nothing to lose,” Shuvalov said. “For them it’s the only chance.”
Armando Armas, an opposition member of Venezuela’s National Assembly told Time “So Russia made its stronghold here in Venezuela. Now they are using Venezuela as a guinea pig for their experiment.”
The petro goes live… or does it?
Venezuela officially launched the petro in August. Simultaneously, it replaced its much-devalued bolivar with a new fiat currency, the sovereign bolivar. The new currency is pegged to the price of the petro. That’s a questionable decision since there’s no way to trade petros.
Early on, Venezuela claimed that exchanges like Bitfinex would list the petro. Bitfinex denied listing the petro. The exchange’s statement said it “never had plans to include the [petro]… Bitfinex will not list or transact the [petro] or other similar digital tokens.” Bitfinex even barred its employees and contractors from dealing in the petro.
Venezuela did announce a list of 16 cryptocurrency exchanges that would list the petro. Reuter’s investigation, however, couldn’t find 7 of the exchanges or any evidence that the other exchanges supported the petro.
One reason crypto exchanges are avoiding the petro is that it bears all the hallmarks of 2017’s ICO scams. ICO Index, for example, flagged the petro as a scam token. There’s no clarity on how oil reserves back up the token. There’s no github repository. The petro’s constantly-crashing website indicates a lack of “technical competence.” On top of that, ICO Index suspects that Venezuela will take the money and run.
A token with little footprint
Reuters found little sign that Venezuela’s cryptocurrency exists. The reporters couldn’t find any stores that accepted the petro. The region beneath which the petro’s oil reserves lie has almost no oil-production infrastructure. Government officials gave contradictory statements. Some said the petro was bridging the gap in imports, but others said the coin was still being developed.
Even the agency responsible for the petro doesn’t seem to exist.
On the other side of the world, another effort is underway to create a digital fiat currency on the blockchain. The Republic of the Marshall Islands’ (RMI) government wants to supplement the US dollar as its legal tender as the first step towards monetary independence.
The Marshall Islands is an archipelago of coral atolls with a 70 square-mile surface area spread out across 700,000 miles of the Pacific Ocean. That’s comparable to the size of Hilton Head Island relative to the American South. After the Second World War, the Marshall Islands became a trust territory of the United States — and a site for American nuclear testing. The RMI is now a sovereign nation, but still depends on the United States for defense, administrative services and a shrinking amount of financial aid.
In February, the RMI’s legislature authorized a national cryptocurrency called the Sovereign, or SOV, which will run on a new blockchain called Yokwe. Rather than being a replacement currency, the legislation declared, “SOV will circulate as legal tender in addition to the US Dollar.”
The legislature also recognized that any national cryptocurrency would need to comply with the international banking system’s anti-money-laundering (AML) policies. “All users of the SOV will be required to undergo standard Know Your Customer (KYC) procedures and requirements… The Legal Tender Committee shall ensure that this KYC process and requirements are effectively applied at the ICO process.”
Supporting the Marshall Islands
The project will distribute a maximum of 24 million sovereigns. The RMI gets half of the sovereigns and will use proceeds from their sale to fund four separate trust funds:
- National Trust Fund: A new sovereign wealth fund whose investments will support the RMI’s budgets.
- Green Climate Fund: Will support projects to counter sea-level rise, manage fisheries and other environmental efforts.
- Nuclear Legacy and Health Care Fund: Support long-term care for people suffering the legacy of America’s nuclear tests.
- Resident-Citizen SOV Allocation Fund: A distribution to citizens of the Marshall Islands.
All 12 million of the remaining sovereigns go to an Israeli crypto startup called Neema.
What is Neema?
Neema founder Barak Ben-Ezer, spoke with Haaretz about his company and the Marshall Islands. “I looked for a country that would be open to the idea,” Ben-Ezer said. In particular, Ben-Ezer was looking for “countries that I thought would accept the cryptocurrency as legal tender.” The right country, he said, would have to be small, obscure and allied with Israel in the United Nations. “I [also] added another parameter: that the country not have a currency of its own, which is how I got to the Marshall Islands.”
Neema’s legal advisor Yuval Shalhevet, told Haaretz “the central bank of the Marshall Islands was involved in the process, but since they don’t have a currency, the rulers of the Marshall Islands had never dealt with monetary regulation. We helped write the law.”
In an interview with Isreali financial site Calcalist, Ben-Ezer added that the Marshall Islands’ close connection with the United States was another deciding factor.
Neema is developing the protocols upon which the Yokwe blockchain will run, managing the ICO, and facilitating the blockchain’s operations. Of the 12 million sovereigns Neema will receive, Ben-Ezer explained, some will go to company executives and the remainder to fund Yokwe operations.
The Marshallese perspectives
With the legislation’s passage, President Hilda Heine stated “This is a historic moment for our people, finally issuing and using our own currency, alongside the USD. It is another step of manifesting our national liberty.”
David Paul, the RMI’s minister-in-assistance to the president said that the cryptocurrency “is the way of the future. As a country, we reserve the right to issue a currency in whatever form it is, whether in digital or fiat form.”
The Marshall Islands Journal reported on growing frustration among the nation’s legislators. At a recent legislative session, Senator David Kramer asked the government “how come we get updates on the SOV from outside media? Where’s the update from the government?”
David Paul responded negotiations with American and international financial regulators had slowed the pace. “This is why we are waiting. We want to minimize the risks.”
International Monetary Fund objects
The International Monetary Fund (IMF) regularly reviews the health of nations’ financial systems and recommends areas for improvement. The latest IMF staff report on the Marshall Islands flagged the sovereign cryptocurrency as a particular risk.
The IMF encouraged the RMI “to be cautious about issuing a decentralized digital currency as a second legal tender and carefully consider the macroeconomic and financial stability risks.”
The RMI’s connections with the global banking system became tattered as banks in the United States tightened their AML procedures. The RMI’s Bank of Marshall Islands, the IMF reported, is “at risk of losing its last U.S. dollar correspondent banking relationship.”
Adding a cryptocurrency to the mix could make the Marshall Islands’ too risky for US banks, effectively isolating the Marshall Islands from the world economy.
Marshall Islands responds
The IMF staff report included a formal response from the RMI’s government. It acknowledged the IMF’s concerns and committed resolving them over time.
“Given these sorts of issues, the authorities expect it will take a few years to issue the cryptocurrency. They will only issue the SOV once its use complies with the FATF standard and US regulations, and once its use in transactions in the US financial system has been approved by the US government.”
After news of the IMF’s criticism broke, the Marshall Islands’ David Paul released a statement to Cryptovest.
“We are taking a methodical and measured approached to ensure that anti-money laundering mechanisms are embedded into the currency itself – a first for any currency. We look forward to further engaging with the IMF and other international stakeholders and introducing them to these protocols in the coming months.”
Earlier this year, Reuters reported that Iran was ready to launch a crypto-fiat pilot project. The announcement came shortly after Iran banned all cryptocurrency trading and prohibited any foreign exchange outside the banking system. The threat of renewed US economic sanctions has sent Iran’s leadership scrambling to reinforce their country’s financial system.
Reuters reported, however, that Iran’s experimental cryptocurrency would not be affected. “The central bank’s (ban) does not mean the prohibition or restriction of the use of the digital currency in domestic development,” said Information and Communications Technology Minister Mohammad Javad Azari-Jahromi.
Iranian financial news agency IBENA provided more details on the proposed cryptocurrency. Built on HyperLedger, the private blockchain will not support mining. Since Iran’s fiat currency, the rial, will back each token, only the Central Bank of Iran will have the power to issue new tokens.
Subject to approval from Iran’s banks, the first phase will enable interbank money transfers. The second phase will roll out consumer-level retail payments.
Payment Platforms’ Utility Tokens
Don’t believe everything you read. Despite the headlines, none of the following digital currencies are actually sovereign cryptocurrencies. None of them have true government backing. And some of them don’t even run on a blockchain.
Though they aren’t blockchain-based fiat, they are examples of using utility tokens to lower the cost of mobile payment networks.
If you believed the breathless headlines in 2015, Tunisia was the first country to launch a national cryptocurrency. But that isn’t really what happened. The reality is that Tunisia launched an interesting blockchain-based project.
Tunisia’s national postal service, La Poste Tunisienne (LPT), had an electronic payment system called e-Dinar. LPT customers could use it to pay utility bills and send money to each other. In a nation of more than 11 million people, however, only about 700,000 people used e-Dinar.
With a high-minded goal to expand financial inclusion, LPT decided a blockchain-based system would let e-Dinar reach more people with a wider range of services. The postal service announced in 2015 a pilot with Tunisian startup DigitUs and Swiss crypto company Monetas. This is the announcement that swept the crypto media and forums as a “national cryptocurrency.”
The e-Dinar’s development
Development began in 2016 with high hopes. Monetas Chief Marketing Officer Vitus Ammann told SwissInfo that Tunisia was just the first step. “Our ambition is global. In countries where there is not much financial infrastructure the benefits you get from a system like this are enormous.”
DigitUS launched the e-Dinar app in early 2017. By the end of the year, however, Monetas founder Johann Gevers claimed to SwissInfo that “slow progress” forced the blockchain project to put things on hold.
However, the truth may lie in Switzerland rather than Tunisia. Gevers is mired in controversy for his leadership of scandal-ridden Tezos. Monetas itself had to declare bankruptcy and is in the process of being sold off.
Other non-sovereign cryptocurrency projects
Another blockchain-based e-payment system that could be confused with a national cryptocurrency was announced last year by Dubai’s Department of Economic Development (DED).
The DED wants to roll out a new contactless payment system called emPay. Emiratis will use their mobile emPay apps for utility bills and retail purchases. Near-field communications will also let users make emPay-to-emPay money transfers.
“A digital currency has varied advantages, faster processing, improved delivery time, less complexity and cost, to name a few.” DED Deputy Director General Ali Ibrahim explained. “It will change the way people live and do business in Dubai.”
However, the Emirate of Dubai is just one of the United Arab Emirates. emPay and its emCash utility token are not replacing the dinar as the UAE’s sovereign currency.
Just as much confusion surrounded Senegal’s so-called digital currency. The earliest reports from Finance Magnates and iAfrikan cited each other as the source of the news. Their headlines about Senegal’s “blockchain-based currency” and “national digital currency” quickly spread around the crypto world. The actual announcement from Irish digital currency firm eCurrency and the Banque Régionale de Marchés (BRM) didn’t help.
eCurrency’s technology uses cryptography, but it is not based on a distributed ledger. It’s a centralized approach for central banks to develop centrally-managed digital fiat. “Digital fiat currency issued by the Central Bank” is eCurrency’s slogan. eCurrency never claimed to be blockchain-based. But many in the media didn’t notice.
The BRM specializes on the institutional side of banking in western Africa. A close reading of the press release from BRM and eCurrency reveals the two companies’ actual goal: a way to link West Africa’s various digital payment systems. Running eCurrency’s digital currency platform, BRM would provide other financial institutions a way to “facilitate full interoperability between all e-money payment systems.”
Puffery and confusion
The vague wording only makes sense with an understanding of the West African financial system. Eight francophone countries in West Africa, including Senegal, share a common currency, the CFA franc. A central bank, the BCEAO, manages the region’s monetary policy and is the only institution that can issue fiat.
Unfortunately, BRM decided to call its system eCFA and promoted its potential for use as “a digital currency in the West African Economic and Monetary Union.” BRM’s CEO Alioune Camara added that “An eCFA backed by our banking system and the central bank is the safest and most secure way to enable the digital economy.” The eCurrency press release made things worse by linking the project with the firm’s long-term vision of digital fiat.
Misunderstandings, puffery and bad branding led many in the media to one conclusion: “national blockchain”. These headlines swept the crypto world and leaked into the mainstream media.
Don’t anger central bankers
The BCEAO’s central bankers were not impressed. In a statement issued to La Tribune Afrique, the BCEAO said “The authorities of the Central Bank, in none of their communication, have given credit to the intention of the BCEAO to introduce a digital ticket called the e-CFA. On the contrary, they have constantly denied the false news spread on this subject”
The BRM later released a statement apologizing for the confusion and announcing that its digital money project would be getting a different name. The status of the eCurrency project isn’t clear. In October 2018, however, BRM launched a different payment platform built on technology from other companies.
Other non-sovereign, non-blockchain currency projects
There are other eCurrency projects underway in Indonesia and the Philippines. The announcements do a better job of explaining that these are mobile payment systems rather than national cryptocurrencies. However, eCurrency still tries to position its projects as moves towards national digital currency.
Non-blockchain National Currencies
Ecuador made a big splash in 2014 when it announced a new digital currency. A bank crisis in 2000 led Ecuador’s earlier governments to scrap its national currency and adopt the US dollar. However, that gave Ecuador’s politicians little control over their own country’s monetary policies. Going digital seemed like the right answer.
Three years later, however, only 42,000 people had used the system to make a purchase. At the end of 2017, the Ecuadorian National Assembly decided to phase out the centralized currency in favor of private mobile payment systems.
Undeterred by Ecuador’s failure, the Banco Central de Uruguay (BCU) announced it would explore the issuance of digital pesos. The e-Peso, however, is not based on a blockchain as BCU President Mario Bergara made clear at a press conference. “This is not a cryptocurrency such as bitcoins,” iProfesional quoted Bergara saying. “This is not a new currency, it is the same Uruguayan peso that instead of having a physical support has a technological support.”
Whether based on blockchains or not, whether nationally-backed or not, there are some common themes running through all of these stories. They all take place in nations with weak financial systems. Whether that weakness is due to colonial legacies or institutional corruption, these countries all seek a path to stability.
Many of these stories also feature fintech startups that want to make their vision of digital fiat into a global reality. In other cases, government leaders isolated by the US-led global financial system see cryptocurrencies as a way to bypass that system altogether.
These projects could undermine the potential for sovereign cryptocurrencies. Some of the projects are designed to bypass geopolitical sanctions. Others take advantage of nations desperate for a silver bullet solution to intractable problems. Even well-intentioned projects will struggle. After all, how could a central bank control a decentralized system? Putting power in the hands of a few simply recreates the same flawed model we have today.