By Everett Rosenfeld
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, this time adopting the use of digital currency.
Ecuador’s Sistema de Dinero Electrónico (electronic money system) kicked off in December by allowing qualifying users to set up accounts, and it began acting as a real means of transaction earlier this month. Last week’s agreement with the country’s taxi companies to use the new system, will be its first real test.
Once the system is fully operational, 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.
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 month that it had signed a deal with the 60,000-member national taxi organization to accept electronic money. The agreements signals the beginning of the project’s second phase in which users can pay for select services and send money between individuals.
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.
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 Valencia, 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.
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.
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.