The BBC published an article on Saturday “Ecuador gives details of new digital currency” reporting that the Central Bank of Ecuador was to issue a digital currency. The story apparently originated with the New Delhi Television (NDTV) technology team, to which the BBC provides a link. The BBC report is largely a rewrite of the NDTV article but claims that the money is to be used to pay civil servants, which is flatly contradicted by the NDTV article, and which apparently comes from an August 24th piece in the Wall Street Journal attacking the plan. The official currency of Ecuador is the US dollar with coins denominated in fractions of a dollar issued by the Central Bank and The WSJ article labelled the proposals “an escape hatch to get out of dollarization.”
So what is actually happening?
In May, Diego Vinueza, the Chairman of the Central Bank of Ecuador (BCE), explained in a letter to Radio Democracia which had broadcast a hostile interview:
The BCE, in its obligation to provide more and better monetary and financial services to the public, is developing the Electronic Money System (SDE). The SDE will provide the option for each and every Ecuadorian to redeem part of their physical money with electronic money or electronic money with physical money, in order to facilitate receiving and making payments safely and efficiently in different regions of the country.
Globally physical money is less important because citizens increasingly prefer to make their payments [using] more secure and practical means. As an example, in the UK the physical money represents only 3% of the money in the economy, while in Ecuador 21%.
In an earlier letter responding to a hostile newspaper report Sr. Vinueza had written:
According to regulations and plans of the BCE, the person who wants to avail money mail on their cell phone or other mobile device, shall deliver the same value in American dollars. Delivered physical dollars will become part of the assets of the BCE that will cover one hundred percent (100%) of electronic money requested. Therefore, if a person wants to convert their physical electronic money dollars, they can do so at all times. The electronic money is one hundred percent supported, like the fractional coins issued today by the BCE and used with confidence by all citizens.
According to a June 3rd briefing note for the National Assembly of Ecuador:
The Central Bank defines e-money as “monetary value equivalent to the value expressed in the currency of the country (the dollar) that is stored and exchanged only through mail, phones, computers, devices, etc. recognized as a means of payment and is convertible into cash at face value.
The previous day, the Central Bank had published the first chapter of its Manual for the Procedures and Operation of the System of Electronic Money which reads in full (courtesy, as with all documents quoted, of Google Translate):
Principles for the Backing of Electronic Money
Article 1. – the provision of electronic money issued by the Central Bank of Ecuador (BCE) to natural or legal persons, directly or through authorized agents will be in exchange only for: i) dollars of the United States of America, ii) coins issued by the BCE or iii) dollar deposits of the United States of America duly accredited to the BCE.
Article 2 – the electronic money in circulation is recorded as a liability in an account in the balance sheet of the BCE and shall be supported at one hundred percent (100%) with liquid assets of the BCE. The degree of liquidity of these backing assets should be analogous to the degree of liquidity of the assets of the freely available international reserves (RILD).
Article 3 – it is prohibited for the BCE to deliver electronic money against exchange of any kind of securities issued by public or private entities.
The plan thus seems to be to provide a mobile payments system operated by the Central Bank. The news reports mention that the system is to be based on software currently in use in Paraguay. According to a 2011 case study by Mobile Money for the Unbanked (a division of GSMA the global mobile network operators’ industry body), Paraguay has two operators, Tigo and Personal, running mobile payments services. Tigo’s “Giros Tigo” works on a local agent shop-based principle with customers paying cash over the counter at one shop which the recipient can collect from a different shop on the basis of an SMS notification. Personal’s “Billetera Personal” operates through no-frills customer accounts provided by two partner banks to provide an electronic wallet which allows users to make money transfers, merchant payments and bill payments. Since Ecuador’s focus seems to be on payments, rather than money transfer, it is probable that it is Personal’s sytem that the Central Bank will base their electronic money system on, although the Bank will presumably have to establish a network of local agents like Tigo’s to handle cash payments.
The key point about all this, of course, is that since the system is to provide payments services as well as cash transfers, payments recipients must be provided with accounts at the Central Bank. This means central bank accounts for all. The immediate incentive for Ecuador as a dollarised economy is not, as its hostile critics maintain, to allow the government to turn on the printing press and inflate away its debts (since its debts are all in dollars) but to gather in some of the dollar bills currently held by its citizens. Ecuador’s foreign reserves currently stand at $5.5 billion whilst its money supply as measured by M2 is $36 billion. If the Central Bank can reduce the use of cash from its present 21% to nearer the UK’s 3% of payments by issuing electronic currency in exchange for $6.6 billion (18% of $36 billion) in US banknotes currently held by its citizens, then the country’s foreign reserves will more than double.
So the message is, when it comes to providing central bank accounts for all, there is no such word as “can’t”.