Last month, the long-troubled South American country of Ecuador came to the attention of the bitcoin community when the country’s Congress passed a new law that would create a state-backed digital currency, while at the same time banning the use of existing cryptocurrencies. The move struck many as extraordinarily preemptive, as bitcoin adoption in Latin America is still extremely low. Equally confusing was the law’s decree that Ecuador’s central bank would create an entirely new digital currency, even though Ecuador doesn’t even have its own local currency, having officially used the U.S. dollar since 2000. The country isn’t known for being technologically advanced, and there is little reason to believe that the central bank is in much of a position to create and implement an effective digital currency.
With all that in mind, Ecuador’s new law seems like a bewilderingly aggressive overreaction. Thanks to Bloomberg‘s Nathan Gill, however, the full context of the move is finally coming to light. It seems that Ecuador’s digital currency initiative is less about banning bitcoin than it is an attempt to create new money out of thin air in a desperate attempt to pay its bills.
Less than six years after repudiating $3.2 billion of its dollar-denominated debt, Ecuador has dwindling oil reserves, with current-account deficits that are draining dollars from the economy and financing needs at a record. While using virtual money to pay government workers and contractors would help conserve hard cash, the currency may prompt [President Rafael] Correa to boost spending even more and undermine the nation’s ability to repay long-term bonds, according to Landesbank Berlin Investments.”
Being tied to the U.S. dollar means that Ecuador’s central bank can’t do the thing that central banks are most known for in bitcoin circles: Print new money. By launching a native digital currency and using it to pay workers and contractors, the government appears to be attempting a work-around that would let it keep its dollar supply while still seeming to meet its local obligations. This new currency is to be backed by non-dollar assets, allowing the books to appear balanced.
As Bloomberg reports, analysts fear that once the Ecuadoran digital money system is created, the government will force local creditors to accept it rather than dollars. Those businesses will then face a significant risk should the digital currency fail, providing further incentive to move their money out of the country. Ecuador’s government may be able to pay its bills with the new currency, at least on paper, but it may come at the cost of massive erosion to the actual economy.
Banning bitcoin and other cryptocurrencies may simply be a means to force Ecuadorans to adopt the new digital currency. Given that Ecuador has one of the largest black market economies for a country of its size in the world, and that the newly created official digital currency will likely have no use outside of the country itself, the move seems incredibly risky.
It may, as Bloomberg suggests, be an act of economic desperation.
