"The airdrop will be a gift to each and every recipient, for him or her to spend or save," said auroracoin on its website.
"This one-time event will create the conditions for Icelanders to start using the currency, by providing them with a start and making them aware of the currency and its possibilities."
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Auroracoins — which are based on litecoin, another virtual currency — will be distributed using the government's national ID database from midnight.
"Although the thorough registration of the entire Icelandic nation into one database is unfortunate, it creates opportunities to reach a large part of the public through various means," said auroracoin on its website.
It added that using auroracoins would help Icelanders get around the strict currency controls that were instigated to restrain outflows after the country's banking collapse in 2008.
"These controls were supposed to be 'temporary', but as with so many government actions, they remain in place to this day… The power must be taken away from the politicians and given back to the people. Cryptocurrencies are a very important milestone in this fight for liberty," said auroracoin.