A venture capitalist Zooms into Palau...

Why Tim Draper became the Pacific nation's first digital resident

Yesterday, the American venture capitalist Tim Draper became the first digital resident of Palau, a small nation in the Pacific ocean due east of the Philippines and north of Indonesia. The event was marked by a ceremony conducted over Zoom, with four Palauan officials, including the new president Surangel Whipps Jr, sitting masked up in a room as Draper joined in from an office in California.

The event had all the features you’d expect of an official state function: participants stood up for the national anthem, flew the national flag (it’s really cool!), and waxed philosophical on the country’s traditions and history. Did you know that the islands are the birthplace of the OG blockchain some 4000 years ago? Apparently, islanders would harvest and transport gigantic stones and mark their ownership through trust networks and oral tradition. I certainly grasp the “block” part… but not so sure about the chain. Fortunately for you, that is not what I’m here to write about!

Palau’s new digital residency program essentially provides people with a sovereign-backed digital ID with which they can do things that their home jurisdictions might not (yet) allow. In other words, it functions as a flag of convenience for people doing things online. I had the privilege of interviewing the president of Palau, Surangel Whipps Jr., about the project, and he’s definitely the chillest head of state I’ve ever spoken to: he had a Hawaiian-style shirt on, a cool floppy haircut, and seemed like he’d be really fun to have a longer chat with because he uses real English words, not corporate management speak.

During the interview, I asked him to describe to me someone who could benefit from being a digital Palauan, and he explained that residents of states like Hawaii can’t buy and sell cryptocurrencies from Hawaii with their Hawaiian ID (note: they could, but my understanding is that it’s a pain in the ass because of the way the exchanges are restricted.) With a digital ID, the idea is they’d be able to participate in these markets more freely and essentially transcend their location and nationality … with an assist from Palau. And yes, there will be background checks similar to the ones banks use to make sure they aren’t doing business with money-launderers (who all still seem to have bank accounts, but OK.)

For individuals, this is a nice service to have; for Palau, it’s the first move in a bigger bid to become a place with the kinds of regulations that draw crypto-currency companies to register there, thereby making the country money through fees, licenses, taxes and whatnot.

Palau is not the first country to go here: Estonia has a relatively longstanding and popular digital pass that gives foreigners access to its banking and corporate infrastructure (as it happens, Tim Draper was the third E-stonian) and other jurisdictions, including NEOM in Saudi Arabia, are making their own plans (Draper said at the press conference he’d been in conversations with some people in Kazakhstan, “but I think there’s been turnover there so I think they dropped it.”)

Draper also gave a spiel on the importance of economic freedom, digital innovation, and the usual crypto-boostery Silicon Valley fare. I’m not going to get into that either because I’m sure you’ve heard that stuff before—and also because there was a more interesting (to me) discussion about the role of individual states in creating this new digital world, and the kinds of states that tend to get involved in these forward-thinking projects.

In our brief interview, Pres. Whipps was totally clear-eyed about how Palau’s national sovereignty was not a magical mystical potion, but an asset that can help the country make money. Draper, on his part, pointed out that the combo of state sovereignty + smallness can often yield interesting results from a regulatory standpoint. “I’'ve noted the innovations are now coming from smaller countries: Macau got very excited about Bitcoin, Switzerland also got very interested in Blockchain, recently El Salvador made Bitcoin a national currency and these innovations are happening in small companies, er countries,” said Draper (catch the Freudian slip?) “And I thought about how venture capitalism is, and [how we] invest in entrepreneurs that start with very small businesses… that impact big industries.”

I’ve been thinking a lot about smallness lately as well—partly because I recently read Christopher Bruner’s 2016 book about offshore centers. I’m of two minds about the book: one one hand, it argues rightly that “offshore” is about so much more than low tax, and that laws, regulations and loopholes can actually be way more appealing to companies registering in exotic locations than low or no taxes (though those never hurt!) Palau, if successful, will be a good example of that.

Bruner doesn’t necessarily believe this system creates a “race to the bottom” from a legal or regulatory standpoint, though, because these places tend to be quite well governed/not super corrupt. I guess that really depends on your definition of corruption (so much reprehensible stuff (like state capture) is totally legal!) and also how much you factor in global problems like inequality and the role of offshore centers in all that.

Politics aside, Bruner sketches a clever profile of an archetypal “market-dominant small jurisdiction”, which I’ve copied below. I thought it was a useful schema, particularly when it comes to some of these wannabe crypto centers. It’s a bit wonky but it’s easy to see where Palau/digital residency fits in.

While working on my long-suffering second book, I’ve thought a lot about the concept of deterritorialization, and whether it’s actually happening. The idea that we can actually do away with the physical world and transact and interact purely online is really silly to me—have we learned nothing from the drudgery of pandemic Zoom? It sucks! No-one likes it! This also holds for the potential of digital communities/countries—the whole reason people want to start ridiculous Crypto Islands or whatnot is because we’re social creatures and being online gets old and boring and has limits. What’s more, our geopolitics will not allow a sovereign entity to be conjured up out of the Metaverse, or an asteroid (though I’m not ruling it out in the future). If you want that kind of power today, you have to work with what the world already has: a couple hundred countries, the landmass they occupy, and the people and politics in them.

It’s also true that so much stuff, and particularly stuff that holds value, isn’t really a thing anymore so much as a contractual relationship “coded” in national law, as the brilliant Katarina Pistor puts it, before it is de-nationalized and de-territorialized and, I don’t know, sublimated, I guess. Countries—and the gaps between them—are what enables capital to become stateless. And that’s the rub: you have to have a solid place in order to make things this slippery and placeless. Tax havens have done this for a long time for money, and digital residency programs are an attempt to do it for people (and, of course their money.) Which, when you think about it, is pretty cool, but will definitely not help solve physical human things like climate migration.

That said, there’s apparently a 300,000 person waiting list to become a digital Palauan, and you can be sure that I am on it (though probably, sadly, near the bottom.) If I am successful, I will post about it some more!