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Ecuador’s new virtual currency is a source of pride, worry

Discussion in 'Digital Currencies' started by Ahillock, Aug 17, 2015.



  1. Ahillock

    Ahillock A nobody Mother Lode

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    Ecuador’s new virtual currency is a source of pride, worry

    Jaime Rojas keeps his antiquated cellphone on the dashboard of his taxi. He can’t use it to play games or check Facebook, but his “dumb phone” has recently become a powerful tool: He can use it to buy gas, receive fares and send money to family.

    Mobile banking has been around for a decade, but this tiny Andean nation recently became the first country in the world to create its own virtual currency. Unlike Bitcoin, Ripple or Peercoin — crypto-currencies with no central bank backing — Ecuador’s dinero electrónico is legal tender, trading alongside the U.S. dollar, which has been the official currency since 2000.

    Authorities say the mobile money scheme is a way to offer financial services to those in remote areas where banks are scarce and to help jump-start small businesses. Skeptics, however, fear the system opens up a backdoor for the cash-strapped administration to shed the restrictions of its dollarized economy and, just perhaps, “print” its own digital currency.

    Rojas, 55, is among the 47,456 people who have opened mobile accounts since the system went live in December. He says he primarily uses it to buy gas. And while he rarely encounters customers with e-money, he’s grateful when he does.

    “This way you don’t have to struggle to find the exact change,” he said, as he plowed his yellow cab down a busy street. “And it’s safer than carrying cash — because of the risk of getting robbed and all that business.”

    The government’s control of the virtual currency market (all others are illegal, including Bitcoin) has its advantages. Within a few minutes, anyone with a cellphone on any carrier can open up a mobile account — and money can be added at any bank or other registered outlet.

    Growth in the system, however, has been slow. There’s only $645,669 worth of digital cash in circulation and less than 1 percent of the country’s 17 million cellphones are registered to the service, according to Central Bank figures.

    Dual Currency?

    But it’s the potential for government abuse that worries many.

    While mobile money is commonplace throughout Africa and in countries like Haiti and Paraguay, “this is the first time that [electronic money] has been created as a monopoly by a state,” said Abelardo Pachano, who was the head of Ecuador’s Central Bank on two occasions. “In the event that its use becomes widespread, it could generate profound distortions and call into question the viability of our monetary system.”

    On the surface, the innovation seems benign: To receive a digital dollar, a customer has to turn in a physical greenback. But Pachano and others worry that the central bank has too much leeway over the use of those physical dollars, including financing the national debt by buying government bonds.

    “That initial liquidity that backs the whole system could be turned into non-liquid assets that could cause economic problems under certain circumstances,” he said. In short, if e-money became widespread, and there was ever a mass rush to redeem the currency, it could collapse the system.

    Others imagine a future where the indebted administration begins paying public salaries or servicing domestic debt in virtual currency — essentially pumping new, unsupported money into the market and fueling inflation.

    Ecuador’s Central Bank insists that safeguards are in place and that no such moves are in the works.

    Sucre death

    Even so, there are historical reasons to worry about Ecuador’s money. After seeing soaring inflation and the collapse of the sucre currency in the 1990s, then-President Jamil Mahuad took the drastic decision of dollarizing the economy on Jan. 9, 2000. The currency switch was brutal as people saw their life savings evaporate overnight and Mahuad was toppled just weeks later. But it also helped turn the economy around. In 2000, inflation topped 90 percent, but by the following year it had dropped to 22 percent and has been in the single digits ever since.

    The stability helped spur investment and led to solid growth. But using a foreign currency means that monetary policy is set in Washington, not in Quito.

    President Rafael Correa, a U.S.-trained economist who has embraced Venezuelan-style 21st century socialism, has bristled under the dollar. In his 2009 book, Ecuador: From Banana Republic to No Republic, he wrote a chapter called “Ecuador’s Monetary Suicide,” in which he equated dollarization with “going backward” and adopting the restrictive gold standard, which the United States abandoned in 1933.

    “It seems like dollarization is a type of Latin-American machismo applied to monetary policy,” he wrote. “You eliminate the national currency and you’re forced to compete or die.”

    Correa blames the recent dollar appreciation and falling oil prices for sapping $2 billion worth of exports during the first quarter. But he’s also admitted that the costs associated with abandoning the buck would be “catastrophic.”

    Not everyone believes that the president is unwilling to make the leap. Simon Pachano, a political analyst with the Latin American Faculty for Social Sciences in Quito, worries that the virtual money may be Correa’s stealth route back to a national currency.

    “Correa has always wanted to abandon the dollar,” he said. “For him it’s an aberration. It bothers him to be the president of a dollarized country.”

    Political backlash?

    In a sense, one of the biggest drawbacks of Ecuador’s system is the government backing, said Lindsay Lehr, a mobile money expert and the senior director of Americas Market Intelligence.

    In countries where mobile money is offered by the private sector, it’s often seen as a much-needed solution. In Paraguay, 17 percent of all cellphone users also have mobile money accounts, and in Haiti 15 percent are in the system, according to Americas Market Intelligence data.

    In Ecuador “since it is the government behind it, it’s receiving a lot of opposition, criticism and cynicism,” she said from her offices in San Francisco. There’s the perception that “the government has ulterior motives or that it’s a political play — which very well may be true.”

    Almost nine years into his administration, Correa has been facing demonstrations over his economic policies and his belligerent attitude toward the opposition. In this environment, almost all of his proposals, including e-money, are facing a backlash. On Thursday, labor groups, indigenous organizations and the opposition are planning to begin a national strike asking for reforms.

    So even as Ecuador continues to expand the system (users will be able to pay utility bills and bus fares soon) it’s unclear whether people are ready to embrace the initiative.

    Rojas, the cab driver, says he’s proud to be an e-money pioneer, but he also recognizes its limits.

    “I know old taxi drivers who don’t even have a mobile phone so they’re never going to use this system,” he said. “But I hope it does catch on.”

    http://www.miamiherald.com/news/nation-world/world/americas/article30968391.html
     
  2. Professur

    Professur Midas Member Midas Member Site Supporter ++

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    WTF is 21st century socialism? I haven't noticed Venezuela to be any better off than 1950s USSR
     
  3. SQUEXX

    SQUEXX Banned

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    Some idiot in the bank trips over a computer cord, the computer goes off and the Senor Rojas loses his life savings!
     
    gringott likes this.
  4. gringott

    gringott Killed then Resurrected Midas Member Site Supporter

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    Sounds pretty ominous to me.
    I would not be surprised to find out that this is a bankster experiment for future implementation world wide.
    They are desperate to get any and all private capital out of physical, including paper and coins.
    That way they get a cut of every transaction, either by tax or fee, or both.
    Added bonuses: Everybody carries a tracking device. A record of every transaction. Nobody can transact without it, except by barter.

    Welcome to your Brave New World, 1984 style.
     

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