Tiny Palau seeks to blaze trail with official cryptocurrency

One of the world’s smallest nations hopes to launch the first government-backed national stablecoin in 2022. 

Palau is aiming to launch a government-backed digital currency [File: Jackson Henry/Reuters]

Palau – population roughly 18,000 – is unlikely to be at the top of many people’s minds when they think of places at the cutting edge of technological innovation.

But the tiny Pacific island nation, located about 900km (559 miles) west of the Philippines, is on a bold mission to spearhead the official adoption and endorsement of cryptocurrencies.

Under a partnership with United States-based cryptocurrency company Ripple, Palau is exploring plans to launch the world’s first government-backed national stablecoin in the first half of 2022.

Pegged to a real-world currency

While running on the same digital ledger technology, or blockchain, as other cryptocurrencies, stablecoins differ from other digital currencies in having their value pegged to a real-world asset such as the US dollar. For stablecoin proponents, that gives the digital currencies an edge over notoriously volatile cryptos such as Bitcoin, whose price has swung between $5,000 and $65,000 in the last 20 months alone.

Palauan President Surangel Whipps, Jr has touted the adoption of a stablecoin 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 gross domestic product (GDP).

Palau’s GDP shrank by 8.7 percent last year, with a further contraction of 17.6 percent expected in 2021, according to a report by the Graduate School USA, largely due to the collapse of travel due to COVID-19.

The Asian Development Bank in April granted the country a $25m loan to keep it afloat.

Ripple, which is based in San Francisco, has pledged to work with Palau to explore “a USD-backed stablecoin”, strategies for cross-border payments and other features using its XRP Ledger such as a corporate registry.

In a media briefing last week, Whipps said he envisaged citizens purchasing goods in shops with their phones and government employees receiving their salaries instantaneously instead of waiting days for the transaction to go through at their bank.

“Why not make it that simple?” Whipps told local reporters.

“Having a digital currency in some ways kind of eliminates the need for a bank,” he said. “You know, it makes it so everybody’s their own bank.”

Some advocates see digital currencies as a way to empower people who lack access to banking services [File: Shannon Stapleton/ Reuters]

‘At the mercy of the inflation of the US dollar’

Under the plans, which remain in the early stages following the signing of a memorandum of understanding last month, Palau’s digital currency would be backed by the US dollar.

Palau, which is an independent country but relies on the US for aid and security under a Compact of Free Association, 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 acknowledged by the Palauan leader himself, who has described the “first step” as getting “as much information as we can”  to “come up with a plan to harness and make use of this”.

Ongerung Kambes Kesolei, editor of the Tia Belau newspaper, told Al Jazeera that while the idea of emerging technologies might excite some people in the country, most had little idea how cryptocurrency worked.

“It is a highly volatile industry but whether it would work, the jury is still out there,” Kesolei said.

“There is a cryptocurrency market but still, many countries around the world are sceptical or in a wait-and-see attitude. No one country is fully diving in, which shows that this economic sector is still in its early stage of development so to say it would work can’t be said right now.”

Lord Fusitu’a, a vocal cryptocurrency advocate who sits in parliament in the Pacific Island nation of Tonga, told Al Jazeera there was a danger in putting the digital currency of a country in the hands of a private company.

“The world’s first stablecoin is not an honour,  I would not brag about it because you’re effectively putting your country at the mercy of the inflation of the US dollar, but without getting any of its benefits,”  Fusitu’a said.

“And you’re tying it to a digital currency that’s owned by a private company, that the people in Palau did not vote for. This is a private company, and private companies have only one function, and that is to make a profit for themselves.”

Fusitu’a also questioned the choice of Ripple, which the US Securities and Exchange Commission has taken to court for allegedly violating rules against the trading of unregistered securities. Ripple has denied the SEC’s allegations, arguing that its digital coins are not securities under the law.

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

‘The nature of money’

Countries have taken varied approaches to the emergence of cryptocurrencies, the total value of which last month exceeded $3 trillion, according to CoinGecko.

In September, El Salvador became the first country to start accepting Bitcoin as legal tender. Many other governments have eyed digital currencies with suspicion, with countries including China, India, Indonesia implementing or considering a ban.

Ross Buckley, an expert in FinTech and digital currencies at the University of New South Wales in Sydney, Australia, told Al Jazeera that while officially-backed digital currencies had the potential to empower people in the Pacific who lacked access to banking services, there were many challenges to their implementation.

Buckley said countries such as China, the UK and Canada had yet to launch official digital currencies despite years of research and planning.

“It’s a very complicated thing to do because it changes the fundamentals of the economy in quite a profound way,” he said, adding that it would be even more difficult for a country without a central bank.

“It’s almost really difficult to understand how a country without a central bank would do it because it’s a change in the nature of money.”

Source: Al Jazeera