First government-issued virtual currency may be on the way
- Published: Sep 15, 2014, 10 AM
A country in the United States’ own neighborhood — one that uses the U.S. dollar as its official currency, no less — is close to issuing a new government-backed virtual currency.
The National Assembly of debt-ridden Ecuador passed legislation in July that would create an official virtual currency backed by the state with “liquid assets,” according to a Bloomberg report published online Aug. 11.
The virtual currency has yet to be named. According to an AP story published online Aug. 29 by Salon, existing virtual currencies like Bitcoin were banned from the country in the same legislation that would create the new one.
AP cites officials from Ecuador’s Central Bank as expecting the virtual currency to begin circulating in December. It would be the very first government-issued virtual currency.
Since 2000, the official currency of Ecuador has been the U.S. dollar, a unit the Ecuadorian government, of course, has no control over. Officials say that the new virtual currency will be made available along with the U.S. dollar, which will remain in use in Ecuador.
Ecuador is one of several countries that accept U.S. dollars as official currency. The term for such a phenomenon is “dollarization,” as Timothy B. Benford explained in a 2004 Coin World article.
“Dollarization occurs when a foreign country makes the foreign currency of another nation its official or major legal tender and reduces its own currency to a secondary role, if it elects to still keep its own,” Benford wrote.
Sacagawea dollar coins are more popular in Ecuador than they are in the United States, Benford wrote in a 2002 article. That year, 5 million Sacagawea dollars were shipped to the country after several years of only fractional U.S. coins — cents through half dollars and nationally issued centavos through 50 centavos — being available to Ecuadorians.
Ecuador’s decision to issue virtual currency could eventually provide a glimpse at what a country without hard cash might look like. Some experts, AP reports, believe the establishment of the government-issued virtual currency could be a move toward dropping the U.S. dollar, which President Rafael Correa has denied.
Nathalie Reinelt of U.S.-based Aite Group told AP she thinks it’s likely that Ecuador’s decision is based on its need to create more money at a time the country owes large debts.
According to Bloomberg, Ecuador’s public spending has tripled since Correa took office in 2007, and a $4.5 billion budget shortfall is expected this year.
In May, Ecuador has put up as collateral more than half of its gold reserves for a $400 million loan from Goldman Sachs, and it borrowed $2 billion from China that same month against future Ecuadorian oil output.
Finally, Ecuador borrowed another $2 billion through high-interest bond sales in June.
AP reports that the law stipulates the use of the virtual currency will be voluntary and will not be used to pay public employees or contractors, or purchase financial instruments.
Some worry about that stipulation to not compensate workers and contractors changing in the future.
“This is usually the start of debasement, inflation and depreciation,” Lutz Roehmeyer of Landesbank Berlin told Bloomberg.
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