The Marshall Islands Launching a Controversial ICO

The Marshall Islands is conducting an ICO for a digital token called the Sovereign, or SOV. Yes, the sovereign nation of the Marshall Islands, a small country in the Pacific Ocean between Japan and Hawaii, is holding an ICO.

That ICO has already been hit with controversy. The Israeli startup running the ICO, for example, is collecting 50% of the total amount raised as a “fee”. There are concerns it could bring economic ruin to the country.

Another issue is that the ICO is being promoted as a tax-free investment haven. Because the SOV is a “real currency” supported by the Marshallese government, you can earn huge returns on the currency while paying 0 taxes.

Blockchain analyst Preston Byrne recently explained details of the ICO on Twitter, including why the ICO could be the worst decision the 60,000-person island nation has made in its 30-year history as an independent nation.

I know that I have a bad habit of taking on crypto projects, and I should really stop doing it, but there's this one crypto project which is really quite bad, and I can't frankly help myself.

It's the $SOV ICO being undertaken by the Marshall Islands. As in the country.

— Preston Byrne (@prestonjbyrne) September 13, 2018

Here are the details of the ICO, as reported by Byrne and other crypto analysts online:

The Marshall Islands is using an ICO to raise funds, and the funds raised from the ICO will turn into a currency that the Marshallese people can use

To be clear, this doesn’t seem like a system where the funds raised will be used to back the token; instead, the funds raised during the ICO will be used to effectively double the money with tokens

The ICO is being promoted with one primary benefit: tax efficiency; investors are being told that, because SOV is a “real currency” and not a property, investors will not need to pay any capital gains whatsoever

Obviously, this is wrong for so many reasons; you always pay tax on forex gains

First, it's using an ICO to raise funds which it then will turn into a currency that its people can use. This doesn't mean it's ICOing and then the currency will be backed by the raise. Au contraire; it appears to means they're ICOing and then doubling their money with tokens.

— Preston Byrne (@prestonjbyrne) September 13, 2018

Nevertheless, the Marshall Islands ICO promoters insist that “SOV meets the highest standard for ‘real’ money because it’s “the legal tender of the Republic of the Marshall Islands”

This is also wrong, as Byrne explains:

Second, it appears the primary benefit that the ICO promoters are selling the scheme on is “tax efficiency.” Because it's “real currency” rather than property, meaning no capital gains! So invest!

1) This is flat wrong. You pay gains on forex gains. pic.twitter.com/IspCbzORCh

— Preston Byrne (@prestonjbyrne) September 13, 2018

2) Regulators do not have a definition of “real” money that is consistent because there are 195 countries in the world, 194 of which are not the Marshall Islands, and each of which will have different tax rules which are not consistent.

— Preston Byrne (@prestonjbyrne) September 13, 2018

The Marshall Islands ICO scheme is being orchestrated by an Israeli company named Neema. None of the promotional materials mention how many tokens Neema is getting through the ICO, nor has Neema explained how it’s getting paid for its contributions to the ICO. As far as the promotional materials explain, Neema is performing the ICO out of the goodness of its heart.

Third, there's an Israeli company, Neema, orchestrating and organizing the scheme. Unsaid: how many tokens Neema gets and how much it is getting paid for its contributions to this enterprise.

— Preston Byrne (@prestonjbyrne) September 13, 2018

The government of the Marshall Islands is fully involved with the scheme. The Marshall Islands has announced plans to retain the USD as a currency at the same time as using the SOV as legal tender. That means all debts, public and private, in the country will be able to be redeemed in SOV:

Fourth, the Marshall Islands intends to retain USD as a currency *and the SOV* as legal tender at the same time, allowing all debts, public and private, to be redeemed in a highly illiquid, highly volatile security-type instrument backed by and redeemable for nothing.

— Preston Byrne (@prestonjbyrne) September 13, 2018

Here’s how Byrne sums up the issue:

All told, this looks like a one-shot deal to put a few million bucks in the Marshallese Treasury which could collapse overnight, with unfavorable tax treatment, which will make a startup very rich, which will jeopardize the MI's American aid.

This project should not proceed.

— Preston Byrne (@prestonjbyrne) September 13, 2018

One of several major issues with the ICO is the presumption that currency gains will not be taxed whatsoever. The ICO is specifically being promoted with the idea that, because the SOV is a real currency from the Marshallese government, there will be no tax implications. This is a “gray area” at best and complete investment fraud at worst according to analysts online.

The Marshall Islands is attempting to raise $30 million through the ICO.

Of that targeted $30 million, the Israeli startup behind the project, Neema, will take $15 million – or 50% of the raised amount.

That’s a ridiculous sum that turns the Marshall Islands ICO from a problematic investment into a full-blown scam.

Here’s one of the problems with that fee:

This means that the Marshallese Sovereign coin will, on Day 1, have $30 million outstanding but will only be backed by $15 million in public funds which, presumably, will be quickly spent.

Does anyone know anyone influential in the Marshall Islands with any common sense?

— Preston Byrne (@prestonjbyrne) September 13, 2018

Essentially, the ICO aims to create value out of nothing. The team is collecting funds for an ICO, and then doubling those funds by releasing tokens. Meanwhile, half of the money is being funneled to a foreign startup. All of this, according to analysts, makes it unlikely for the Marshallese people to see any benefits from adoption of the SOV coin. In fact, it could bring economic ruin to the country – especially if the United States withdraws foreign aid.

The Marshall Islands ICO has been greeted with shock across the international financial community. The news has become so big that the International Monetary Fund (IMF) has been forced to issue a statement about the ICO.

“[Marshallese government] authorities should seriously reconsider the issuance of the digital currency as legal tender,” wrote the directors of the IMF in a report, as reported by CoinDesk.

As the BBC points out, the 60,000-person country has just one domestic commercial bank. By adopting a digital currency as legal tender, the Marshall Islands risks losing its only corresponding banking relationship with another bank in the United States. Because of that relationship, residents of the islands can transfer dollars in and out of the country. That relationship could be in jeopardy with the launch of the SOV as legal tender.

There are also implications on foreign aid:

“Adopting a digital currency as an official form of legal tender would threaten both financial integrity and the nation's key relationship with the US bank. The result could be disruption to foreign aid, according to the IMF.”

In any case, the Marshall Islands ICO for its “Sovereign” (SOV) digital token is scheduled for later this year. We’ll see if this controversy – and the threat of losing international aid – dissuades the Marshall Islands from adopting the SOV as an official currency.

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