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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.
Ecuador is planning to create what it calls the world's first digital currency issued by a central bank, which some analysts believe could be a first step toward abandoning the country's existing currency, the U.S. dollar. The electronic money, which Central Bank officials say they expect will start circulating in December, does not have a name and officials would not disclose technical details, though they said it would not be a crypto-currency like Bitcoin. The amount of the new currency created would depend on demand.
Deputy director Gustavo Solorzano said it is 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 percent of participants in the economy — too poor to afford traditional banking, officials say.
Initially, it will be able to make and receive payments on cellphones, Solorzano said. Such mobile payments schemes are especially popular in African nations including 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.
Leftist President Rafael Correa has said the project's only problem is that it has taken this long, defending it against "pseudo-analysts who have appeared in the media trying to smear (it)." He denies any plan to replace the U.S. 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 is already used in Paraguay by cellphone companies.
He said it is 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 wants, risking inflation.
Nathalie Reinelt, an emerging payments analyst with the U.S.-based Aite Group, said she does not understand any other motivation for creating such a currency than to allow Ecuador to increase its money supply and, essentially, devalue its U.S. 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 LLC.
Some believe it could be a first step to abandoning the U.S. dollar, Ecuador's currency since January 2000. Correa denies it puts dollarization in peril.
His government has tripled social spending, and opposition lawmaker Ramiro Aguilar says it "has a serious fiscal liquidity problem. It needs money ... It doesn't mint money. It has no control over what circulates."
The state is currently $11 billion in debt, mostly to China, which buys most of Ecuador's oil. It recently sold $2 billion in bonds with a 7.95 percent return, as well as obtaining another $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 state contractors, according to the law. Nor can it be used to buy financial instruments the Finance Ministry emits.
Some question whether Ecuador's Central Bank is constitutionally empowered to create such a currency.
"Let's remember that the Central Bank has no autonomy, and this could lend itself to all manner of political maneuvers," said independent political analyst Jaime Carrera.
Associated Press writer Frank Bajak contributed to this report.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.