Palau: The small island nation’s finance ministry is keen to use blockchain technology | Credit: Jay Park (Pixabay)

A Japan-based fintech company has been tasked with developing a blockchain-based government bond issuance platform in one of the world’s smallest countries.

According to an announcement this week by the company, Soramitsu will build a system to issue, manage and operate savings bonds using blockchain technology in Palau, an Asia-Pacific island nation with a population of just 18,000.

The initiative, backed by funding from the Japanese government, is the latest sign that the potential of fintech to help governments is increasingly being recognized by governments in every corner of the world, no matter how small and relatively remote.

Tourism is the main driver of the economy of Palau, which has the US dollar as its official currency in an archipelago of about 340 islands, islets and atolls (only eight of which are inhabited). It has been 30 years since Palau, which hosted a ‘Blockchain SummitIn August 2023, it became independent thanks to a “Pact of Free Association” with the United States.

“Although U.S. dollars are the circulating currency in Palau and banks in the United States (such as those in Hawaii and Guam) take residents’ funds as deposits, these funds are used in the continental United States rather than for economic growth or infrastructure in Palau,” Suramitsu he explains in his job announcement.

“To address this problem, Palau’s Ministry of Finance intends to issue savings bonds to diversify national financing methods and use the absorbed funds for economic growth and infrastructure investments such as bridges, roads and public facilities, with the support of Soramitsu technology.”

RELATED ARTICLE Blockchain Bonds: Digital Issuance Innovations Create Excitement – a webinar report (convened by Global Government Fintech on March 23, 2023) asking: “Blockchain-based bonds: what potential for the public sector?” (the report contains a link to a video recording, which is 1 hour, 23 minutes and 29 seconds long)

The advantages of blockchain

The Tokyo-based company says that, “at the request” of Palau’s Ministry of Finance, it will develop the savings bond system and its application using Iroha Hyperledger blockchain technology: distributed ledger software from the Hyperledger Foundation, part of the Linux Foundation.

According to Soramitsu’s announcement (July 16), the Japanese government funding comes from the Ministry of Economy, Trade and Industry’s 2023 supplementary budget titled “Subsidies for Future-Oriented Co-Creation Projects in the Global South (Indirect Subsidy Project Related to the Investigation of Overseas Infrastructure Development by Japanese Companies).”

The company outlines the benefits of using blockchain for a bond issuance and management system, including reducing operating costs and fees and preventing counterfeiting, tampering and “impersonation,” which translates into greater security.

It also takes a cross-sectional look at central bank digital currencies (CBDCs), stating that “in the future, the introduction of technologies like CBDCs (including those potentially issued in the continental United States) that use blockchain could make the buying and selling of savings bonds through smart contracts and other technologies more efficient.”

US authorities have adopted a very cautious attitude towards the potential introduction of a CBDC. Former President Donald Trump earlier this year vowed to stop the launch of a US CBDC if he is re-elected to the White House in November’s elections, calling the potential digital dollar a “dangerous threat to freedom.”

RELATED ARTICLE Melody Unleashed: Finance Ministries Explore Blockchain – a report from a blockchain-focused session at the Global Government Fintech Lab 2023

Payment projects in the Pacific region

Soramitsu’s announcement also states that in addition to its work in Palau, the company will also work with the Central Bank of Papua New Guinea to conduct a CBDC proof of concept and “aim to build a common platform for the entire Pacific Island region using Soramitsu’s blockchain technology.”

“Financial inclusion remains a significant challenge in the country, where some areas are plagued by instability, violence and frequent robberies and assaults,” the company says, explaining that it is “exploring digital technologies that will enable the recovery of funds after such incidents using blockchain technology to address these issues.”

In its announcement, the company seeks to link its multiple new roles together.

“Since Pacific island nations each have relatively small populations and economies, the burden of introducing and maintaining IT system infrastructure is significant,” he says. “Therefore, Soramitsu aims to develop an architecture that enables the more convenient and efficient introduction of financial instruments such as CBDCs and savings bonds by building a common platform using secure, permissionless blockchain technology based on Hyperledger Iroha.”

The company partnered with the National Bank of Cambodia to develop the Bakong payment system, which has been operational since 2020. Bakong is used for both wholesale transactions between major banks and retail payments for daily transfers and payments by citizens and businesses. “Idle cash in rural areas has been transformed into bank deposits through Bakong, revitalizing the economy through use for infrastructure and financing for small and medium-sized businesses,” the company says.

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Global trend

Palau’s Ministry of Finance would become the latest addition to an increasingly diverse list of public sector “blockchain bond” issuers.

THE The World Bank has kicked off its “blockchain bond” project with the launch of bond-i – the first bond to be created, allocated, transferred and managed throughout its lifecycle using distributed ledger technology (DLT) – in 2018.

Hong Kong authorities announced successful issuance of tokenized green bonds just under 18 months ago and, in August 2023, released a report outlining potential next steps to promote broader use of tokenization technology for bondsEarlier this year The Hong Kong government has completed the issuance of two-year digital green bonds denominated in Hong Kong dollars, renminbi, US dollars and eurosThe Hong Kong Monetary Authority described the issuance as “the world’s first multi-currency digital bond issuance.”

THE The Philippine government has announced its first tokenized treasury bond offering in November 2023, saying it wanted to “provide proof of concept for broader use of DLT in the government bond market.”

A couple of months ago, an urban authority in the US state of Massachusetts broke new ground for the use of innovative technologies in the US public sector by launching a municipal bond issuance using blockchain. The City of Quincy Public Authority has issued $10 million (about £8 million) of tax-exempt bonds using the technologydeclaring that it had taken “a first step in transforming the U.S. municipal debt markets.”

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