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Finance

Ecuador: What Does the Digital Currency Move Mean?

After a severe bank crisis in 1999 – 2000, the Ecuadorian Sucre lost over 70% of its foreign exchange value. This prompted the country to start using the US Dollar as their national currency. Now just 14 years later, no one is quite sure what the Ecuadorian Government is up to as they announced they will add a new unnamed form of digital currency to serve alongside the dollar by December 2014.

This move would be the first such currency by a central bank of an independent country. And the Ecuadorian Government claims this is a way to help the nation’s poor pay their bills in a country where 40% of the population does not have a bank account or use other banking services.

At the start of September, journalist Paul Tullis wrote that the government is “trumpeting this move as enabling safe storage and transaction of money for people locked out” of the bank-based economy and increasing opportunity for the poor.

The money will be backed by so called ‘liquid assets’. It will be a voluntary and largely cell-phone-based-system, but it does not take into account the fact that a lot of the poor must be able to gain access to, and learn how to use, the technology. This could be a significant challenge to get the new currency to be both accepted and used. The government has also clearly stated that the new currency will not be used in the payment of government employees; a strange move considering doing that would give Ecuador’s citizens more confidence and incentive to use the new digital currency.

Many wonder why Ecuador would want to change things with its currency in the first place. Since adopting the dollar as the national currency back in 2000, the country has experienced unprecedented growth in the region. Tullis argued: “Since the switch to the dollar, per capita income in Ecuador has nearly quadrupled, to $5,720 (despite government policies that are largely conceived to be anti-growth based)”.

With the use of the United States’ currency Ecuador has also gotten the dollar’s inflation rate and its exchange rate against other currencies. As Tullis explained: “The three Latin American countries using dollars today have the lowest ‘misery index’ (the sum of the inflation, unemployment, and bank lending rates less the GDP growth index) in the region”.

These figures seem to strongly indicate a very favorable growth pattern compared to the rest of the region. So why would Ecuador want to risk harming that growth trend by introducing something new which may not work?

Many experts feel this new digital money is just a veiled attempt to get away from the dollar and try to establish a new national currency, a move that the Ecuadorian government has vehemently denied. In August, journalist Gonzolo Solano, quoted Leftist President Rafael Correa as saying, “It has taken this long to implement because of having to constantly defend the new digital currency against pseudo-analysts who have appeared in the media trying to smear it and there is no plan in place to replace the US dollar”.

Other people remain skeptical. According to an article by analyst Venzen Khaosan in September, “The Ecuadorian National Assembly’s explicit intention with their central bank’s new digital currency is to allow the government to make payments in this new digital currency instead of the dollar. This makes it clear that their plan is to institutionalize the use of a national currency for internal cash flow and eliminate Dollar and foreign currency dependency”.

RT News also quoted emerging payment analyst, Nathalie Reinelt, of the US-based Aite Group as saying she, “doesn’t see any other motivation for creating such a currency and regards the move as a step towards giving up the US dollar funds”. All this sure seems to indicate a trend that has been carefully planned to escape from underneath reliance on the dollar.

There are other indications too that this is a move that continues to further separate Ecuador from the US and the strong influence that goes with that. This may be spurred on by Russia and China’s burgeoning influence in the region.

Ecuador’s close ties with China are evident by the estimated 11 billion dollars in loans that China has given them in the last 10 years and the fact China is also by far the biggest purchaser of Ecuadorian oil. China may actually be playing a bigger role here by urging Ecuador to make these types of moves. There is nothing that would make China happier than to establish a bigger footprint in America’s backyard and a rebellious and anti-American leaning Ecuador could influence others in the region to do the same.

Other indicators also signal Ecuador’s continuing move away from the US’s influence in the Americas. They ejected 20 department of defense employees from the US Embassy in April of this year. And Ecuador boldly proclaimed that they do not accept Ukraine’s newly elected government as a legitimate one, something that was an unprecedented move for a country that lies in the shadow of the US’s overwhelming sphere of influence.

Will the Central Bank of Ecuador adjust and manipulate the exchange rate? This is the very question many experts wonder about. Tullis said: “If millions or billions of dollars’ worth of this new digital currency are circulating, the government can use it instead of U.S. dollars to pay its bills. Once the money is out there, the government can change the exchange rate against the dollar—this is the same kind of shenanigans that led to the chaos Ecuador was trying to escape when it adopted the dollar in 2000”. It would be a huge step back for the country if these types of occurrences take place again. This should be a very worrying prospect for the Ecuadorian people.

It will be interesting to see what happens over the next few months when the speculation stops and the currency goes into circulation. Once that happens, over the course of the next year it will not only become clearer if the new currency is being accepted and used, but what the real intentions of the Ecuadorian government were for creating it in the first place.

 

Unites States based Journalist Craig Smith has parlayed his 26 years as a manager and owner in the swimming pool construction industry into a career in freelance financial and technological writing.  

 

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Craig Smith

Unites States based Journalist Craig Smith has parlayed his 26 years as a manager and owner in the swimming pool construction industry into a career in freelance financial and technological writing.  

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