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In 2000, Ecuador moved to ditch its stumbling currency for the U.S. dollar. Now more than 15 years later, the South American country is revamping its monetary system again—using digital currencies.
Ecuador's Sistema de Dinero Electrónico (electronic money system) kicked off in December by allowing qualifying users to set up accounts, and it will begin acting as a real means of transaction this month.
Once the government flips the switch, the South American nation of 16 million will host the first-ever state-run electronic payment system. (Other countries, such as Sweden, use digital currencies widely, but they're not state-sponsored.) But the Ecuadorean government says the scheme is designed to support its dollar-based monetary system, not replace it.
"Electronic money is designed to operate and support the monetary scheme of dollarization," economist Diego Martinez, a delegate of the President of the Republic to the Board of Regulation and Monetary and Financial Policy, wrote to CNBC in a comment provided by a central bank spokesman.
Martinez said that Ecuador law expressly states that economic transactions are conducted in U.S. dollars.
Electronic money will not only help the poor, he added, but will act as a cost-saving mechanism for the government: Ecuador spends more than $3 million every year to exchange deteriorating old notes for new dollars, Martinez said. There would presumably be less wear and tear on the currency if much of it was stored at the central bank while citizens relied on mobile payments.
"They keep linking it to their frustration to being on the dollar standard." -Lawrence White, professor of economics, George Mason University
Still, others both inside and outside Ecuador have speculated that the country has broader goals. Claiming that there's no plausible reason for Ecuador to provide "an exclusive medium for mobile payments," Lawrence White, a professor of economics at George Mason University, wrote in a recent paper that "it is hard to make any sense of the project other than as fiscal maneuver that paves the way toward official de-dollarization."
White told CNBC that the government's bitcoin ban in July and its barring of competing e-money systems demonstrate Quito's intentions. Although Ecuadorean officials haven't publicly said they view electronic money as a potential exit from the U.S. currency, "they keep linking it to their frustration to being on the dollar standard," White said.
A digital currency would, in theory, allow Ecuador's central bank to issue new money that isn't directly tied to its U.S. dollar reserves. But Ecuadorean officials have repeatedly denied that there are any such plans.
In a letter posted in Spanish on the Banco Central del Ecuador website in August, officials said the proposed payment system is not intended to address the country's bills, that it will not be used to pay government workers and contractors, and that it will not lead to capital flight.
The dollar system has been good for the country's relatively low inflation and low interest rates, White said, adding that it would be difficult to start a new currency without ruining the economy. Ecuador's most recently reported monthly inflation rate of 3.67 percent is lower than neighbors including Mexico, Chile, Costa Rica and Bolivia.
At the very least, White said, the government is looking to turn a profit from holding a monopoly on all electronic payments—and if they really wanted to benefit the poor, Quito officials would allow for competing private-sector systems to drive down costs.
The Central Bank of Ecuador announced earlier this week that it had signed a deal with a 60,000-member taxi organization to accept the electronic money. The project's second phase—in which users will be able to pay for select services and send money between individuals—will begin in mid-February.
Jorge Calderón, the taxi organization's president, praised the electronic money system as potentially improving service, since it will not require drivers to stash as much coinage.
"I think quite rapidly people will be using it all over the place...The plan is quite aggressive—they really want the whole population to use it as soon as possible." -Paul Buitink, instructor, Universidad San Francisco de Quito
A third phase of the electronic money system will begin in the latter half of this year, according to government announcements, and will allow users to pay for public services like taxes through mobile payment.
Fausto Villavicencio, who is overseeing the project for the central bank, said the government expects about 500,000 people to sign up in 2015, according to several Ecuadorean reports.
"I think quite rapidly people will be using it all over the place," said Paul Buitink, a cryptocurrency expert who teaches at Universidad San Francisco de Quito. "The plan is quite aggressive—they really want the whole population to use it as soon as possible."
Buitink said the project has been relatively well received by the Ecuadorean public. There are some concerns about privacy, he said, but it has generally been seen as a positive step.
Not to be confused with bitcoin
Despite several headlines to the contrary, Ecuador's electronic money system is dissimilar from bitcoin. While the world's most popular cryptocurrency is a digital token running on a decentralized (yet cryptographically secured) electronic network, Ecuador's new project would be controlled by the government and tied directly to the local currency—the dollar.
The project initially created buzz in in the bitcoin blogosphere, but that interest faltered once it was clear that Ecuador's project would not present a competing alternative. Not only is the technology importantly different, but Ecuador's electronic money system currently can be accessed only by qualifying citizens and residents.
CNBC Explains: How bitcoin works
In fact, Ecuador's project is more similar to M-Pesa, a mobile phone-based money transfer service started by Vodafone, according to Pete Rizzo, the U.S. editor for cryptocurrency site CoinDesk.
In many ways, the new system will be a government-run version of Venmo—users will be able to make payments with the aid of a cellphone and store value in their accounts. But unlike the popular smartphone application, the Ecuadorean version will be able to run on "dumb" mobile devices too.
The electronic money system does not require Internet access or an account with a financial institution, and it can be redeemed for physical money at any time, the central bank's website said.
Having read this what you must realize is that this is a puppet government of the USA. This is a test of how their population will react to a Cryptocurrency managed by a central bank. If it passes the test, expect it in your city within a short time.
For those who have been following the recent ISM reports, one of the recurring concerns of respondents in both the manufacturing and service sector has been the congestion at West Coast Ports - which handled 43.5% of containerized cargo in the U.S and where transiting cargo accounted for 12.5% of US GDP - as a result of reduced work output by the local unions who have been more focused in recent weeks on ongoing wage hike negotiations.
And according to the latest update from the 29 west coast ports that serve as the entry point of the bulk of Asia/Pac trade into and out of the US, things are about to get far worse for America's manufacturing base, because as RILA reported earlier, talks between the Pacific Maritime Association (PMA) representing port management, and the International Longshore and Warehouse Union (ILWU) officially broke down on Wednesday, and without an agreement, experts have suggested that nearly 30 west coast ports could be shut down within a week.
As RILA reports, "a work slowdown during contract negotiations over the past seven months has already created logistic nightmares for American exporters, manufacturers and retailers dependent on an efficient supply chain. A complete shutdown would be catastrophic, with hundreds of thousands of jobs at risk if America’s supply chain grinds to a halt."
"A west coast port shutdown would be an economic disaster," said Kelly Kolb, vice president of government affairs for the Retail Industry Leaders Association. “A shutdown would not only impact the hundreds of thousands of jobs working directly in America’s transportation supply chain, but the reality is the entire economy would be impacted as exports sit on docks and imports sit in the harbor waiting for manufacturers to build products and retailers to stock shelves.
One can see why the US retail association is concerned. So will there be a strike? Here is Bloomberg's take:
Union-led work slowdowns could halt the 29 U.S. West Coast ports in five to 10 days, the head of the shippers’ association said, urging the union to accept a new offer that includes 3 percent raises. James McKenna, the president of the Pacific Maritime Association, said backups and delays at many of the ports are harming farmers, manufacturers and consumers as the flow of goods approaches a “coast-wide meltdown.” He called on the International Longshore and Warehouse Union to accept management’s second formal contract proposal since negotiations began last May.
Here are the port workers' demands:
The association of shipping lines, terminal operators and stevedores made public details of its contract offer, including 3 percent annual raises over five years, retaining employer-paid health care, and raising pensions by 11 percent. The average dockworker now makes $147,000 a year in salary, plus $35,000 a year in employer-paid health care and an annual pension of $80,000, according to an association press release.
And while there hasn't been a formal lock out yet, the reality is that the workers have made their displeasure felt loud and clear:
McKenna blamed the union for work slowdowns that have contributed to congestion at the largest West Coast ports, including Los Angeles, Long Beach, Oakland, Seattle and Tacoma. Twenty-two ships were queued up Wednesday at the harbor shared by the Los Angeles and Long Beach ports, up from as few as four in mid-December, according to the Marine Exchange of Southern California, in one measure of the backups confronting shippers.
Some of the impacts of the already experienced slowdown has included keeping U.S.-raised Christmas trees from reaching consumers in Asia, depriving McDonald’s customers in Japan of french fries, and stranded shipments of Mardi Gras beads bound for New Orleans.
Should talks fall apart, it probably will not be the end of the world: a nearly identical situation developed one decade ago leading to a 10 day lock down and which ended up costing the US economy $10 billion per day:
In the conference call, McKenna said the two sides remain at odds over wages, pensions, the duration of the contract and arbitration for workplace disputes. He said the sides are “far apart” on some issues and nearing agreement on others.
Which incidentally, in an economy that is desperate for any "one-time, non-recurring" item to explain what is now global secular stagnation and economic slowdown, an excuse such as a port strike, or a harsh winter, or a strong dollar, or plunging crude, may be precisely the scapegoat that the central-planning doctor ordered.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.