Distributed Ledger Technology for Small Countries. Step 1: currency

Small states are characterized by a small population, limited human capital, and a confined land area. Small countries have always been dependent on the support of larger countries or international organizations, and in many cases, larger local problems can only be resolved with external support.

Over the last 20 years, the introduction of the internet has caused significant changes. For example, the travel industry, which is the main source of income for many small countries, has undergone considerable change. To book hotels and flights before the internet, one had to physically visit a travel agency and use paper-based catalogs. Traveling to many small countries was something “exotic,” not something for everybody. Flights were expensive and accommodation and amenities were substandard. This has drastically changed. Today we can book accommodation in the middle of the jungle of Belize, see pictures and reviews of the accommodation available, and compare the offerings.

This is also reflected in statistics. In 1998, Belize recorded 177,000 tourist arrivals — that number has quintupled since. A Google search for “travel Belize” returns an impressive 80.5 million results. The same of course applies to other industries, and as is clear from the GDP of small states, a massive increase in growth started in 2000.

Source: GDP growth in small states (World Bank)

This highlights how the internet made many small countries significantly less dependent on external support.

Looking at the current situation, and again according to the World Bank, small states share the following challenges:

1. Governments must play a significant role due to the high demand for expenditures.

2. Providing public services to small scattered populations can be costly.

3. Small island states are highly exposed to climate change and natural disasters.

4. Recurrent financial, climate, and disaster shocks reduce the fiscal space.

5. Small states rely on international finance to supplement their fiscal envelopes.

6. Small states do not easily fit the standard development model.

7. Typical policy regimes include common currencies (often linked to the USD), currency boards, and fixed or heavily managed exchange rate regimes, and domestic monetary policy tends to be imported from abroad.

8. Small states lose the nominal exchange rate as a flexible adjustment mechanism and must rely on flexible wages and prices to absorb shocks.

Many of these problems are finance related; therefore, the next step to resolve them focuses on sovereign currencies and related financial solutions. This step is now possible with the introduction of distributed ledger technology (DLT). DLT is the fourth revolution: the printing press closed the knowledge gap, automatization closed the power gap, the internet closed the distance gap, and now DLT closed the trust gap.

Small countries need to implement their own sovereign currency using this technology, with a government-controlled, rather than a third-party controlled, cryptocurrency or a decentralized currency.

“De-risking” and vulnerability were two of the main topics discussed at the World Bank Small States Forum 2017. When financial institutions seek to de-risk, they cause the withdrawal of correspondent banking relationships in small states. The resulting financial exclusion is a matter of concern for the international community. Reduced remittances and impediments to economic growth and doing business are some of the main consequences of this withdrawal. This problem can be solved almost immediately with the implementation of a government-backed cryptocurrency.

Furthermore, as the recent natural disasters in the Caribbean highlighted, small states are often highly vulnerable to external shocks. In Dominica, for example, 2017 hurricane damages exceeded 200% of GDP. Responding to such natural disasters and other external shocks requires not only vast amounts of capital, but also rapid responses. A cryptocurrency can contribute to solving this problem. For example, after a disaster, the government can increase the monetary supply for a short period to address the problems and then — if applicable — seek IDA support, which takes time, to recover that investment.