• Michael Bacina

The Marshall Island's Central Bank Digital Currency, powered by Algorand

Forkless blockchain protocol Algorand has been in negotiations with the Republic of the Marshall Islands for some time for the island's planned Central Bank Digital Currency (CBDC).

The SOV is described by the SOV Foundation and recognised under Marshall Island law (the Declaration and Issuance of the Sovereign Currency Act 2018) as "the new legal tender of the Marshall Islands". The law establishing the SOV is 8 pages long, the same length as the original Bitcoin whitepaper.

The Marshall what?

The Marshall Islands is an island nation of 55,000 living on 1,100 islands in approximately 1.9 million square km of the Pacific Ocean (near Papua New Guinea north of Australia). The advantages of moving from paper or credit/debit card dependent money (few Marshallese have these in any event) in such a dispersed population to a digital system which can survive disconnections from the main network is clear.

The Islands don't have the resources to replicate other countries financial systems Cheques are still used for most payroll payments, with money changers charging hefty fees, and inter island payments still done in cash on boats. and the Islands have always used USD as a de facto currency, since the government has never issued it's own currency. In addition, the Marshall Islands was a testing ground post World War 2 for Atomic weapons, with the equivalent radiation to more than 1 and a half Hiroshima size bombs going off every day for 12 years.

What's Algorand and how are they involved?

With interest in CBDCs continuing to soar, Algorand announced last year they had been selected to run the Republic of Marshall Island's planned digital currency. Algorand is a interesting blockchain which describes itself as "the first pure proof of stake blockchain" designed to be free of forks and the electricity usage which have raised issues on public blockchains.

The Algorand team is a powerhouse of MIT academics including Silvio Micali, who has a storied career in cryptography used in countless applications globally. The Algorand consensus protocol (the way the network decides which transactions are valid or not) is interesting in that it deals with situations which would cause forks in other blockchains in a simple, but powerful way.

Under a proof-of-work system like Bitcoin or Ethereum, if a series of the computers running the network, say on an island, lose their connection to the other islands, say because of a tropical storm, then that smaller series of computers will keep processing transactions and building their own ledger of transactions, separate to and alongside the main network's transactions.

This normally happens in these blockchains but these "forked" chains usually collapse quickly as the network is designed to default to the longest chain that has the most transactions recorded. This works well if all computers remain connected, but as noted above, when perhaps an island becomes disconnected, then they may end up with a dramatically different ledger to the other islands under a traditional blockchain.

Algorand's technology, which will be the base for the SOV currency, uses a different approach, where the smaller network in this case will stop processing transactions if disconnected from the larger network (it's more complicated than that but for our purposes this is basically what happens).

Having a decentralised network go into a "recovery mode" is novel and goes somewhat against the dream of tamperless systems. However, it's obviously more important to have a reliable record of transactions than risk a series of transactions failing at a later time if there is a disconnect and reconnect causing a forked chain to collapse (the transactions aren't reversed or lost, but if some transactions with the same digital currency on the longer chain that transaction is considered correct and so there is a risk for the smaller chain's transactions to be rejected).

So what's next?

Given CBDC's involve necessarily some degree of centralisation, having a system which can automatically stop in a disaster scenario to enable re connection seems sensible and may well make regulators more willing to experiment with this technology. The Algorand deployment for the Marshall Islands won't be decentralised but will be a permissioned system, as would be expected for an experimental system like this.

What makes this pilot even more interesting is that the Marshall Islands use the US Dollar as their currency, meaning they will be rolling out a true USD token, which is government backed (by the Marshall Islands government at least).

If you want to read more about Algorand and how it differs from other blockchains, there is a good plain English explainer here.

© Michael Bacina. All rights reserved

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