I have read about the Marshall Islands partnering with the company Algorand to produce their own cryptocurrency that will act as the nation's official currency. Is there any special benefit from having a nation's official currency being a cryptocurrency that nations working with traditional currencies would not have?
Cryptocurrencies have long been promoted as an escape from traditional, government-backed currencies, so the proposal of the Marshall Islands to create an official state cryptocurrency seems fairly odd at first. However, some research has been undertaken into how a nationally backed cryptocurrency could work - along with analyses of the associated positives and negatives.
Firstly, in chapter 4 of his book "Handbook of Digital Currencies" (2014) , Andras Kristof discusses existing attempts to produce a national cryptocurrency. While all the examples at that time were all set up by individuals, rather than being officially sanctioned by governments, some of the conclusions drawn are still useful. In particular, Kristof concludes that necessary preparations and precautions must be taken, including official backing from government, a robust "Know Your Customer" (KYC) system, and retained control of monetary policy - that is to say that coin creation should be controlled by the government, as opposed to miners.
If the above conditions are met, Kristof predicts that a national cryptocurrency could realise its full potential, by being accepted by the banking industry, making taxation automatic, and also facilitating uses such as smart contracts that we have seen for example with Ethereum. This could be used to replace paper contracts as proof of ownership - things like property deeds or vehicle titles could all be baked into a national blockchain. He goes even further, predicting that an international cryptocurrency recognised by the International Monetary Fund could lead to frictionless global trade.
More recently, in their publication "The wider impact of a national cryptocurrency" (2018) , Dennis Ng & Paul Griffin explore the effect that a national cryptocurrency could have on the major players in an an economy - consumers, merchants, banks, payment providers, international money transfer operators and central banks.
While generally, they found that a national cryptocurrency could provide a range of benefits, including reduced transfer fees for consumers, merchants and corporations, easier and more efficient intra-bank transfers, and the ability to prevent money laundering given the innate transparency of transactions - as well as positioning the adopting nation at the bleeding edge of technological and financial reform - they also urge caution, pointing out that national governments could become responsible for consumers financial losses. They suggest a "sandboxed" approach to mitigate this. In this approach, a financial tech company could apply to test the new currency and their applications in a sandbox arena, allowing issues to be identified and resolved, before a full-scale national rollout.
In conclusion, then, there have been many proposed advantages to a state-backed cryptocurrency, however researchers acknowledge that there is a vast difference between theoretical benefits, and the actual circumstances that will manifest when the policy is tried for real. It is important to recognise that these are predicted benefits - this has never been tried on a large scale before.
: Kristof, Andras. "National cryptocurrencies." Handbook of digital currency. Academic Press, 2015. 67-80.
: Ng, Dennis, and Paul Griffin. "The wider impact of a national cryptocurrency." Global Policy (2018): 1.
Existing cryptocurrencies have many problems, among them the fact that they are not really currencies for many legal purposes. Having a recognized, sovereign nation lend to legitimacy might help a bit.
Cryptocurrencies are just as faith-based as most other currencies, so moving early and establishing a name (and an unique selling point, see above) might establish the Marshalls SOV as a household name.
The RMI expected income from the initial coin offering and from administrating the currency.
This very much depends on the architecture proposed and what the political drivers are.
A national consumer cryptocurrency intended to substitute cash operations while at the same time offering smart contract functionaltiy would need to solve the same problems that, for example, Ethereum 2.0 is still researching. Namely, scalability (number and frequency of transactions) while maintaining security, with complex on-chain contracts.
A consumer cryptocurrency must rely on a 'large number' of nodes in a peer to peer network to maintain security. If on the other hand the architecture involves a centralised system that guarantees security through central control, a more efficient system would be available through traditional application+database type architectures like Visa for example. A centralised architecture is better achieved through "standard" 'non-crypto'currency. In other words, a central bank that controls M4 money.
Still on the topic of consumer-grade money, it may be that the particular government in question has a problem with local financial entities, money laundering, poor relations with the banks, or some such, so one could speculate that an advantage of introducing any state currency, crypto or not, would be to solve those particular problems.
Further, one possible architecture could involve the 'standard' decentralised p2p network approach, but with state mandates and laws on software client usage. For example, if the developers of the crypto-system could work in tandem with the government on legislation, on arrangements, such as for example "it will become law for users of this system to maintain a node on their computer, but all taxation will be automatic and heavily discounted". This could be a monumental, "epic" achievement of huge benefit both to the cryptosystem and to the state. Cryptosystem developers could work with guarantees of hundreds of thousands of nodes, which would not only help guarantee security but transaction throughput.
Moving away from consumer transactions, the present smart contract cryptosystems suffer from scalability problems. In terms of transaction volume they cannot compete yet with the likes of Visa. If, for example, Ethereum 2.0 delivers on its expectations, the impact will be revolutionary in every sense of the word. Payment infrastructure, settlement infrastructure, and various types of legal and financial institution would likely become obsolete. (It is also conceivable that a state controlled cryptosystem network would be an attractive move for a smaller state trying to shield its own finanical services relevance, for example, from the effects of this upcoming decentralised free-reign global network).
Until then, however, these cryptosystems could only deal with low transaction volume, such as aggregate settlements, land registry transactions and the like. Note, by 'transaction' in crypto terminology when smart contracts are involved, we just mean the signal for a general state transition which could mean anything from an account balance change, to the state of an online contract or video game.
The advantages there are manifold. These include removal of legal infrastructure around land registry. Sales of works of art. Settlement of securities transactions , perhaps of certain types only. Private consensus networks can be established that bond the corporate and state elements of the establishment into a trust-less infrastructure. The fact that adoption is still low is just testament, in my opinion, to the fact that the development groups behind these crypto-systems still can't fully get out of the research and development phases. Projects like Ethereum, Tron, Cardano and so are still either 'unfinished' or in one way or another unable to offer the assurances that you could replace the global financial and legal system with them.
It also occurs to me that in the Marshall Islands it would be interesting to know what the relationship is between Algorand and the govt. If the govt has direct or backhander investment in that firm, this might simply be a way of perfecting a highly scalable proof of stake system that Algorand can take global, with Marshall Islands as the test bed and a stake in future profits.
So in summary, on the whole I think it would be interesting to try and understand what the fundamental political drivers are, and then see what architecture is chosen. For example as I mentioned above, it could simply be that that particulare State is worried about losing control of financial services to some outside entity and wants to take control of the financial services sector. Or it could be that the country wants to appear progressive, and attract young technical talent for some reason. Or they have a direct investment in a commercial development company. Once we have the architecture and the drivers we can list what the actual advantages would be.