Palau's digital residency program has received over 700 applications, with critics claiming it may be subject to malicious exploitation

Original Title: 《'Trojan horse': Palau's bid to become global crypto hub could turn it into scammers paradise, critics warn》

Translation by: Hu Tao, Chain Catcher

Critics warn that Palau's new digital residency program could make it vulnerable to crypto scams and corruption, arguing that the program has not undergone sufficient due diligence.

The program allows foreigners to purchase electronic residency cards, which in turn enables them to start companies and sign documents, among other things. Most importantly, when the relevant legislation is passed, it will allow them to engage in cryptocurrency trading, which is useful for residents of countries like China where such activities are not permitted.

"For the first time in history, anyone in the world can participate in basic business and economic activities through Palau's digital residency program," said the country's president, Surangel Whipps, during a virtual meeting to launch the program last month.

The program attempts to emulate Estonia, which launched its e-residency program in 2014. However, critics claim that the program attracts cryptocurrency scammers and warn that Pacific island nations like Palau, which rely on tourism and have been severely impacted by the pandemic, may be exploited by blockchain developers.

"Cryptocurrency developers are rarely attracted to communities in distress because they want to solve problems," said Peter Howson, a cryptocurrency expert at Northumbria University. "Research shows that these cryptocurrency developers are often just looking for new investors and conducting real-world tests."

"There is also Palau's image to consider," he added. "Palau has worked very hard in recent years to maintain its image as a pristine paradise for conservation and nature tourism. The RNS [the system managing the residency program] has the potential to damage that brand, attracting anyone's investment looking for a safe haven to store their ill-gotten crypto assets."

"Even if this is a good deal, we should conduct due diligence. Sometimes we take risks, but we might be dealing with shady people," said former president Johnson Toribiong.

"We are putting our sovereignty and reputation at risk."

Untapped Revenue Source?

The program is different from citizenship; almost anyone can pay a total fee of $248 to obtain a physical ID and an NFT. The annual renewal fee is $100.

It is managed by Cryptic Labs, a blockchain research organization based in Palo Alto, California, through its Root Name System (RNS).

Palau President Surangel Whipps

Whipps stated at the virtual launch of the program, "The installed software will utilize the functions banks use to conduct background checks on people, allowing them to open bank accounts."

"So the criteria for screening people to become digital residents will be the same. And you have to renew it every year."

However, the Palau Financial Institutions Commission (FIC), which regulates financial services, expressed concerns to the Palau National Congress that the level of flexibility provided for social capital in the operating agreement puts Palau at a disadvantage. "This is one-sided, favoring private partners," the FIC stated.

Additionally, it remains unclear how much Palau will earn from the program.

As of Wednesday, the Treasury, which oversees the digital residency office, confirmed that since its launch on February 2, it has collected $71,000 from over 700 individuals who have obtained digital residency. The agency stated that about 40% of applicants are from the U.S., 30% from Europe, and another 30% from Asia, including China.

When asked about the advantages the program would provide for the country, Whipps said, "I think the first step is to keep the program going. Then the next step is to establish companies, allowing them to conduct business transactions in Palau, and also consider setting up a cryptocurrency exchange and establishing other types of activities that can help some funds and people."

"Digital residency offers potential diversification for our economy, which is urgently needed given the impact of the pandemic on our tourism industry," he added.

According to an economic brief prepared by the U.S. government-funded U.S. Graduate School in August 2021, Palau's total financing needs due to Covid-19 will reach 36% of GDP, or $86 million—this was before the arrival of Omicron.

Tourism Minister Ngirai Tmetuchl stated that digital residents could also become a new source of tourism for the island that has yet to be developed. "We want to explore possible tourism opportunities: marketing to members, building networks, and investments from members," he said.

But Howson warned that Palau should be cautious of potential pitfalls.

"We've seen Tonga, Vanuatu, and Fiji also tempted by tech companies from Silicon Valley," Howson said. "And these cryptocurrency people are using natural disasters to impose these ideas on people."

"Are Palauans worried about the coronavirus? Is it time to implement an NFT passport and currency system managed by some tech companies from Silicon Valley? These crypto fixes have proven to be a Trojan horse for many vulnerable communities. Palau should remain vigilant."