The primary objective of the PSC Pilot Project was to assess different use cases and proposed benefits brought by the PSC, in a controlled environment and during a determined period, where up to 200 volunteers from among the Palau government’s executive branch employees would making purchases at a select number of retailers onboarded in this project.
Upon successful testing of the PSC solution design, the long-term objective was to promote the use of the PSC at a national level and make it a convenient and cost-effective way of payment, giving people innovative and secure ways to access & transact with their money without physically going to a bank, handling fiat cash, or paying higher fees associated with credit cards & other electronic payment systems.
The project evaluated the stablecoin’s viability through various feedback and lessons learned gathered from the various volunteers. The project assessed the benefits and challenges encountered, with a view to bringing forward the recommendations for a national deployment of the PSC in the Republic of Palau through a determined scope and continued phased approach.
The report will first summarizes the PSC pilot project structure and timeline and present the overall survey statistics and results with the volunteer’s feedback. Finally, the project tested the technology and verified the benefits which the stablecoin is expected to bring in the Palau payment and economy, while highlighting the various legal, socioeconomic and policy considerations the Palau government should prioritize during such deployment.
What is the Purpose of the PSC project?
The Republic of Palau, an independent, sovereign nation of islands which uses the United States Dollar as its form of currency, will conduct a research and development pilot project to manage minting, distribution, redemption, and destruction of digital currency for Palau (“Palau Stablecoin Project” or “Project”).
To accomplish this, Palau partnered with Ripple, a crypto solutions blockchain company, which develops, supports, and provides hosted software services (“Hosted Services”) based on its proprietary software (“Software”) and related off-site and on-site professional services (“Professional Services”) to manage minting, distribution, redemption, and destruction of digital currency recorded on the public XRP Ledger resource. Palau and Ripple have previously entered into a Memorandum of Understanding dated October 26, 2021, establishing a collaborative partnership to explore the technology, use cases, and potential solutions and benefits associated with digital payments and creating a digital currency backed by the US Dollar for Palau (interchangeably “Palau Stablecoin” or “PSC”).
The Republic of Palau Ministry of Finance (“MOF”) launched a pilot program to explore and implement, in a secure and controlled live environment, technological solutions enabling the MOF to manage minting, distribution, redemption and destruction of PSC digital currency recorded on the public XRP Ledger resource.
The Pilot Program was designed to help:
- establish a scheme for PSC collateralization that is approvable by commercial banks and their regulators;
- determine a reusable accounting structure and integration plan for interacting between the XRP Ledger and the Palau’s core systems;
- provide feedback to the Ripple software development team on key features needed to support the issuance and distribution of a PSC for broad use beyond the Pilot;
- better determine the needs of end users of the PSC to optimize its use case beyond the Pilot;
- evaluate the viability of a use case and present findings to Palau’s stakeholders, namely financial regulatory bodies, and the Palau National Congress, understanding that such stakeholder engagement and implementing legislation are conditions precedent to the mobilization and issuance of a Palau Stablecoin.
Minting, distribution, redemption, and destruction of the PSC requires opening and maintaining collateral bank account for the purpose of holding the US Dollars in an equal amount to the PSC in distribution.
The Process for the PSC
The PSC Phase 1 scope was designed to enable a selection of up to 200 employee volunteers from the executive branch of the government to use the PSC to make purchases from at least three (3) voluntarily participating local retailers. PSC was issued on the XRP Ledger (XRPL) by the MOF and fully collateralized with USD cash deposits held in reserve at a Tier 1 Federal Deposit Insurance Corporation (FDIC) United States bank.
This “closed loop” pilot allowed the MOF to stay in control of the PSC issuance and distribution, with a maximum money in circulation equivalent to USD20,000 (= PSC 20,000). These funds were directly distributed by the MOF with no possibility for any volunteers to “pay-in” to obtain additional digital currency. Nor was it possible for any other non-selected user to get hold of PSC. Moreover, all selected volunteers could only make payments and only the participating local retailers were able to convert PSC to USD deposits in the commercial bank accounts.
All volunteers and retailers volunteering to participate in the pilot signed a legal agreement with the MOF to use the PSC under the agreed conditions and to allow the MOF to monitor the transactions and collect any data available for analysis and statistical purposes.
The creation of the wallet address to receive and transact with PSC was done using the wallet app. Early feedback led to establishing a one-time, single-use access code to restrict creation of a single wallet by authorized individuals, only. Once created, those wallets were then registered in the CBDC Platform (i.e. the PSC issuer & distribution system) with both user registration and PSC distribution managed by the MOF staff.
A detailed solution design captured the overall process, key volunteers, and the PSC pilot lifecycle aligned amongst the pilot project volunteers. The below diagram summarizes the overall workflow:
July 2024 Update: National Government Payment Service Project Phase 2a
The project is ongoing and the last paper released describes the advancements made up to now. You can access the report on the ‘Links’.
Based on the examination of these various use cases, several key findings emerged regarding the implementation of tokenized dollar solutions within the national payment system:
- Efficiency Enhancement: Tokenized dollar solutions can significantly enhance the efficiency of payment transactions by digitizing the national currency. This digitization streamlines the process, reduces settlement times, and minimizes the need for intermediaries, thereby lowering transaction costs and enhancing overall payment system efficiency.
- Transparency and Accessibility: The use of blockchain or distributed ledger technology in tokenized dollar solutions improves transparency by providing an immutable record of transactions. This transparency fosters trust among users and enhances accessibility by allowing real-time tracking and verification of payments, thereby promoting financial inclusion and accessibility for underserved populations.
- Collateral Management: Effective collateral management is crucial for the stability and security of tokenized dollar solutions. Banks play a critical role in holding collateral reserves to back the digital tokens, ensuring their redeemability and maintaining the stability of the digital currency system.
- Legislation such as the Payment Systems Bill is necessary to define banks’ roles in collateral management and establish clear guidelines for risk management, liquidity requirements, and regulatory oversight.
- Regulatory Compliance: Regulatory compliance is paramount in the development and operation of tokenized dollar solutions. Legislation and regulatory frameworks must be established to address issues such as anti-money laundering (AML) and know your customer (KYC) requirements, consumer protection measures, and adherence to international standards. Clear regulations help mitigate risks associated with misuse, fraud, and illicit activities, fostering a secure and trustworthy payment environment.
- Market Confidence and Adoption: Building market confidence and fostering widespread adoption are essential for the success of tokenized dollar solutions. Education and awareness campaigns, along with robust security measures and user-friendly interfaces, can help instill confidence among users and encourage adoption. Interoperability with existing payment systems and integration with financial institutions and service providers also facilitate seamless adoption and interoperability within the broader financial ecosystem.