By Nir Yaacobi, SOV Development Foundation board of advisors
Sovereign (SOV) is a blockchain-based currency which is about to become the new legal tender of the Republic of the Marshall Islands (RMI), following the Sovereign Currency Act 2018 adopted by the Marshallese parliament.
Unlike other blockchain-based currencies such as Bitcoin, Ethereum, Facebook’s Novi/Libra and many more, all of which face various regulatory issues, SOV is a national currency of a sovereign country. It therefore complies with all banking regulation and is subject to international treaties. However, unlike other national currencies, SOV monetary policy is governed by an algorithm rather than by a central bank. This monetary policy is centered first and foremost on a deterministic money supply, starting with an initial offering of 24M SOV and then 4 per cent monetary growth each year. Of this 4 per cent growth, 1 per cent is allocated to the validator nodes for covering the blockchain’s operational costs, while the remaining 3 per cent will be distributed directly among all SOV holders equally.
By design, newly minted SOVs will be distributed equally among all users and not proportionally by the amount of SOV each user holds. We have chosen this for two main reasons: efficiency and equity. It is more efficient since it means SOV will attract more users, stimulate a network effect and gain value from being a popular means of payment, instead of being held by a few oligarchs and gain value from speculative actions. It is more equitable since it will be distributed to the many and not to the few. Not surprisingly it resembles the philosophy behind Universal Basic Income.
UBI is an alternative to the incumbent welfare systems whereby every member of society is granted a fixed equal allowance unconditionally, regardless of their income or any other criteria or status.
Public interest in UBI has increased in recent years, with its advocates usually referring to automation, AI and other technological improvements becoming more significant and more prevalent. These rapid changes can lead to structural and long-term unemployment since they undermine workers’ ability to adjust their skills to newly created jobs. Unemployment and growing wealth inequality have pushed many thought leaders, politicians and economic figures (partial list here) to consider UBI. The COVID-19 pandemic has brought this idea from the fringe to mainstream political discussion. A new Oxford University study reveals most Europeans support basic income after COVID-19. Similar support was found in the UK and USA by another UK research, which the researchers attribute to the increased importance of a system that is simple and efficient to administer while reducing stress and anxiety in society. As Daniel Nettle, one of the authors, explains: “[T]he pandemic is a time when people’s situations are changing rapidly and unpredictably, yet need is urgent. It is simultaneously difficult for governments to gather good information on which to base means-tested or piecemeal assistance. Thus, the simplicity of UBI becomes a stronger attraction”.
UBI has supporters from across the political spectrum. The right wing supports UBI for its economic efficiency and its potential to reduce bureaucracy in incumbent systems. The left wing supports UBI as a safety net against the unforeseen circumstances of life; it frees people from the fear of not meeting basic survival needs, improves health and well-being and enables them to better pursue their purpose in life. Libertarians support UBI because it increases individuals’ freedom, reduces individuals’ friction with authorities (e.g., application, means-tests, inspection, tracking, reporting, etc.) and automatically levels the playing field. Furthermore, due to the unconditionality of the benefits, the beneficiaries are spared from screening, monitoring and stigmas involved with existing means-tests.
Two reasons for the emerging support for UBI are the rise of the gig economy and the associated job uncertainty, as well as the need to act fast during “black swan events” such as the current pandemic. For example, the efficiencies of UBI led the US and Spain to give equal cash transfers to all their citizens during the COVID-19 economic shutdown.
Counterintuitively, equal payment to all members of society reduces inequality. Here is an explanatory example.
Consider an economy with three individuals, A, B and C, with income equal to 1, 2 and 3, respectively. The richest, C, has triple the income of the poorest, A. and receives half of the economy’s total income 6 (1+2+3=6). Now adding an equal income of 1 to each of them changes the income distribution for A, B and C to 2, 3 and 4, respectively. After this UBI, the richest, C now has only twice as much of the poorest, A and receives less than half of the total income (44.4%). Figure 2 shows the before and after income distribution of this simple example and demonstrates how inequality has reduced.
In modern developed economies, new money is created as loans. However, because central banks would not or could not underwrite these loans, they privatized the process to commercial banks as subcontractors. The central bank only issues loans to these commercial banks and to the government. This process ensures that new money (loans) goes to those who can repay it (or to the bankers’ “friends” if the system is corrupt). In either case, it amplifies inequality.
Within-country inequality is mitigated by the government’s social allowances and usually to a lesser degree with progressive taxes. Welfare or tax systemseconomies of scale which cannot be exploited in a country as small as RMI. A blockchain-based currency affords the opportunity to build a stipends mechanism (for all users) and later, if needed, an indirect tax schedule (for Marshallese only) based on algorithms with near-zero administration costs.
UBI is a replacement for welfare allowances and is a complementary measure to UBS — Universal Basic Services such as basic health, basic education, basic dwellings and other services. Unfortunately, the problem of between-country inequality cannot be solved with current within-country UBIs. As Y. N. Harri illustrates in his best-seller 21 Lessons for the 21st Century: “American voters might conceivably agree that taxes [they] paid … could be used to give stipends or free services to unemployed miners in Pennsylvania and jobless taxi drivers in New York. However, would American voters also agree that these taxes should be sent to support unemployed people in places [outside the US]?”
As the first blockchain-based legal tender to comply with Know Your Customer (KYC) and Anti Money Laundering (AML) regulation, SOV has the properties to become a global digital currency. As such, it can be used as a low-cost worldwide preferred currency for money transactions for e-commerce as well as for p2p remittance, including for the unbanked, cutting the high commissions paid today.
All SOV users undergo an identity verification process by one of the many verifiers approved by the SOV foundation to onboard users (see SOV White Paper sec. 2). This identity verification process can be used to ensure that the UBI goes only to real people. To ensure that a user that is registered with multiple validators would not get more than one UBI allotment, the verifier can provide a one-way hash of the user’s country & ID No. that is unique to each user. This zero-knowledge proof enables the SOV Administrative Authority to verify the uniqueness of each user without directly revealing personal data. For users who aren’t satisfied with the privacy-preserving measures offered by the one-way hash, they can opt-out of the UBI and never have this hash generated and shared with the SOV Administrative Authority. Also note that if a user does want to receive the UBI, they can opt-out for all accounts except for one dedicated solely to UBI, keeping data of all other accounts concealed. Identifying unique users enables the introduction of a global UBI with limited centralization of PII.
Coded into the SOV’s monetary algorithm, each user who passes the KYC procedure and satisfies a minor threshold (e.g., holding a minimal amount of SOVs at a certain date or for a minimum period of time) will receive the UBI. The UBI will be calculated as the amount of new SOV issued divided by the number of eligible users. As more people become entitled to UBI, the amount of SOVs each user will receive will reduce; however, based on Metcalfe’s law, the value of SOV can be expected to grow quadratically with the number of users, utilizing the network effect’s economies of scale.
The introduction of SOV and UBI will create a new tool which is currently absent from global financing. Bringing the latest advantages of blockchain technology and a decentralized monetary policy from the periphery of tech-savvy people and sometimes borderline legitimate uses, into the heart of international finance — a sovereign legal tender. The synergy of this hybridization will be utilizing both instruments’ advantages to function as a low cost, fast-operating means of payment in the RMI and around the globe. Growing value and easy to use wallet storage can make this currency a preferred store of value, especially but not limited for the unbanked. Hopefully, more users would yield more usage, higher value and on the fly reduce global inequality. Sounds like a utopia? Well, at least a small step for mankind.