The Marshall Islands have been making headlines all over the world with their final adoption of cryptocurrencies as the national fiat currency on September 4th. The news was broken by the country’s Prime Minister through an essay published online.
The prime minister hopes that this is a major step towards awarding the Marshal Islands its own strategy for monetary and fiscal policy. Although everybody in the crypto community is happy to see cryptocurrencies reach the national level, all of the potential issues need to be considered when other countries decide to go down the same road.
At this moment, the Marshall Islands is the perfect “case study” country to test nationalized blockchain on due to their limited number of residents, around 50,000 at the moment of writing this article. With such a low amount of daily users, it’s possible to fine-tune the blockchain regardless of how small the block size may be.
As you can already tell, my first argument will be made about scalability and the issue of pending transactions due to low computing power or storage issues.
Scalability needs to be addressed
One of the primary issues that every country will face when adopting cryptocurrencies is scalability. Depending on how large the population is, the size of the block will have to be adjusted. Naturally, the government themselves will take the mining process on themselves in order to not privatize the venture, but still, the block size will be crucial in their success.
Let’s take a look at Bitcoin for example. The block size is 1 MB and the trading volumes have become so large that large bottlenecks are being created as we speak. These bottlenecks create pending transactions, which are then processed by miners in a delayed manner. In the end, people get to wait before the transaction is confirmed, which soon starts resembling fiat currency transaction systems that we use today.
Scalability is actually one of the biggest issues that every blockchain developer is trying to solve. Many say that a larger block size is the answer, but then it complicates the creation of new blocks due to the size, therefore still creating bottlenecks but on a much lower scale compared to Bitcoin.
Remember that there aren’t that many Bitcoin transactions happening on a daily basis, maybe a couple of million at best. Now imagine that a country like the United Kingdom adopted cryptos as their main source of currency, how would they combat the tens of millions of transactions that will happen on a daily basis? And they will definitely be transactions, it’s not like you can cash out cryptos, they’re digital assets.
In the case with the Marshall Islands, it’s a much easier process to regulate as there aren’t that many users in the first place, but for a large country, the issue of scalability needs to be addressed.
Emission and global presence
The next issue is, of course, the global recognition of the currency and the distribution of it to various central banks all over the world. In order to conduct relevant trade deals and have the opportunity to exchange currencies in a fast and efficient manner, every trading partner of the “emitting” country will have to have a reserve of that currency somewhere.
This could be a big issue considering that several countries have a permanent ban on cryptocurrencies. For example, if somebody was a major trade partner with Burundi, they’d find it quite hard to reach a deal with them due to their newest legislation about outlawing crypto trading and crypto investments.
Furthermore, the country will have to distribute these currencies to local banks as well, therefore forcing both state-owned and privately-held banks to adopt the blockchain technology when they may not be ready for it. This introduces the obligation to have several new employees in the company such as blockchain developers, cryptocurrency experts, and whatnot.
Overall, it’s safe to say that this development is possible, but requires a lot of pieces to fall into the right places before it can truly take off.
For a major country to switch to cryptos as a whole, they absolutely need to make sure that their most important trade partners and neighbors are ready to do the same.
Next comes the correct allocation of these funds. It’s true that “printing” cryptocurrencies is much easier overall, and it also saves millions in taxpayer money, but the amount that will be leaving the country will have to be very specifically determined.
In the case of the Marshall Islands, the government will have to consider which industries will be the ones responsible for the largest emission.
According to an economic overview of the Marshall Islands by topforexbrokers.co.za (a website from one of the country’s largest trade partners, South Africa), one of the country’s biggest industries right now in the gaming sector, which keeps on growing due to tax advantages in the region.
The more tax advantages remain, the more foreign companies will enter the country, thus exposing the newly released cryptocurrency to leave the country. This will naturally introduce an increase in demand locally, which would be the place most of the trading volume occurs, therefore appreciating the currency beyond control.
A strong currency may seem advantageous on the surface, but remember that the Marshall Islands also relies on exports to support its economy even though they’re receiving handouts from the United States.
A strong currency would make it much more expensive from outside countries to purchase Marshall Islands’ goods, therefore deflating the economy as local manufacturers scramble to find clients abroad.
As long as the country can find a maintainable level of emission through private companies in the country, the monetary value of their cryptocurrency will remain stable, thus empowering the economy.
Another thing that the government needs to consider is that they are releasing a cryptocurrency on the blockchain, which has its own “unwritten laws”. The first law is that user anonymity needs to be protected at all costs, otherwise the technology will be losing a large chunk of its already fading value due to the centralization of the currency.
Luckily though, the Marshall Islands is setting a very nice example in this sense as the prime minister announced that the disclosure of personal information to banks, credit companies, the government or anybody else will be completely voluntary.
In this case, it’s understandable to allow the users to disclose their financial situation to the banks in order to have a legitimate credit score for things like mortgages and car payments. Other than that, the only info disclosure should happen during taxation runs.