Palau holds firm on cryptocurrency moratorium

FORUM Staff

A Pacific island nation is warning consumers that anyone claiming to have the government’s backing to promote a cryptocurrency business is committing fraud and that Palau’s virtual currency moratorium remains intact.

Palau’s Bureau of Revenue and Taxation and its Financial Institutions Commission (FIC) issued a joint statement on November 20, 2019, to tell the public that individuals or businesses are breaking the law if they use previously obtained business licenses — including licenses that were subsequently voided — to conduct cryptocurrency transactions.

The FIC initiated the moratorium in March 2019 after an online cryptocurrency firm advertised that its venture was supported by the government. A report in the Palau-based online news agency Pacific Note said a firm named Palau Coin described itself as a “blockchain technology-based decentralized digital currency of the Palau Tourism Environmental Protection Fund led by the government of the Republic of Palau.” Blockchain is a digital database of records such as financial transactions that can be shared within a publicly accessible network.

Palau’s financial commission said the moratorium on cryptocurrency business would remain in place until the country adopts a legal framework to regulate virtual currencies. Meanwhile, the government “encourages the public, investors and potential investors to conduct enhanced due diligence on any business or corporate entity purporting to be authorized by any governmental authority in the Republic of Palau” to conduct cryptocurrency activities, the joint statement said.

The introduction of cryptocurrencies in the Pacific islands has fueled controversy as startup companies and online vendors promise to stimulate the tourism-dependent island economies by virtually connecting them with investors all over the world.

The Marshall Islands is moving ahead with a plan to make a cryptocurrency its national currency. Called the Marshallese sovereign (SOV), the currency will be a government-issued digital currency. The Marshall Islands currently uses the U.S. dollar as the national currency. The dollar will continue to circulate, although the SOV will be the official legal tender.

The islands went forward with the plan despite being warned against doing so in September 2018 by the International Monetary Fund (IMF). The IMF identified numerous risks, including the possibility that the islands could loseits last remaining U.S. banking partner. That banking relationship allows the islands to transfer dollars in and out of the country. Adopting a digital currency could cause a disruption in foreign aid, the IMF warned, which could pose serious problems in the event of natural disasters or extreme weather events. The benefits of the move are smaller than the “economic, reputational and governance risks” posed by the plan, IMF directors said in their assessment.

Experts point to many drawbacks with digital currency, including that cryptocurrency exchanges have been hacked at an alarming rate. A recent hack of the South Korea-based Upbit exchange was one of seven major hacking incidents involving cryptocurrency exchanges in 2019, according to the news website CoinDesk. Upbit reported in November 2019 that U.S. $51 million in funds were transferred to a virtual currency account unknown to the exchange.