Digital currency is Ecuador's scheme to increase money supply


Ecuador to be First Country to Issue Its Own Digital Currency

From The Associated Press
via South China Morning Post, Hong Kong
Friday, August 29, 2014

QUITO, Ecuador -- Ecuador is planning to create the world's first government-issued digital currency, with some analysts saying it may be a first step towards abandoning the country's existing currency, the US dollar -- which the government cannot control.

The virtual currency, which central bank officials say they expect will start circulating in December, does not yet have a name. Officials would not disclose technical details of the currency, but said it would not be like bitcoin. The amount of the new currency created would depend on demand.

Deputy bank director Gustavo Solorzano said the currency was to exist in tandem with the greenback and, by law, be backed by "liquid assets". It would be geared toward the 2.8 million Ecuadoreans -- 40 per cent of participants in the economy -- too poor to use banking, officials say.

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They would initially be able to use the currency to make and receive payments using cellphones, said Solorzano, at minimal cost. Such payment schemes are already popular in African nations Kenya and Tanzania, where they are privately run.

The new currency was approved, and stateless crypto-currencies such as bitcoin simultaneously banned, by Ecuador's National Assembly last month in a new law.

President Rafael Correa has said the project's only problem was that it had taken this long, defending it against "pseudo-analysts who have appeared in the media trying to smear it." He denied any plan to replace the US dollar, which Ecuador set as its currency in 2000 after a crippling banking crisis.

The official in charge of the new currency, Fausto Valencia, said the software was already used in Paraguay by cellphone firms.

He said the planned currency was not like bitcoin, whose advantage is in its technical underpinnings: only a limited amount of bitcoin can be minted.

Without that safeguard, economists have warned, a government could theoretically create as much as it wanted.

Nathalie Reinelt, an emerging payments analyst with the US-based Aite Group, suggested that the only motivation for creating such a currency was to allow Ecuador to increase its money supply and devalue its US dollar holdings.

"It is far too early to know how they are thinking of making the electronic money work," said analyst Juan Lorenzo Maldonado of Credit Suisse.

Some believe it could be a first step in abandoning the US dollar, but Correa denies this.

His government has tripled social spending.

It "has a serious fiscal liquidity problem. It needs money", said opposition lawmaker Ramiro Aguilar.

"It doesn't mint money. It has no control over what circulates."

The state is currently US$11 billion in debt, mostly to China, which buys much of Ecuador's oil. It recently sold US$2 billion in bonds with a 7.95 per cent return, as well as obtaining another US$400 million from Goldman Sachs in exchange for part of its gold reserves.

Use of the currency will be voluntary and it will not be used to pay public employees or contractors, according to the law. Nor can it be used to buy government financial instruments.

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