So its confirmed Ecuador will be launching their own digital currency. In the meantime, they have banned other forms of private digital currency like Bitcoin.
On the one hand, it is brilliant that the fame of bitcoin, and its distributed ledger technology, has helped Ecuador’s government consider not only the issuing of a digital currency, but the concept that economies can have multiple currencies. I have always thought the power of Bitcoin is in opening minds to the field of currency innovation for the common good, rather than the specific properties of the Bitcoin currency itself.
What should we make of Ecuador’s move? The best starting point is for a government’s central bank and treasury to have a clear public purpose, to serve the long term interests of people. Ecuador is ahead of most in making its Central Bank have to innovate to deliver “buen vivir” i.e. wellbeing. Other central banks simply assume that managing inflation and interest rates within certain levels is what’s key, with some secondary attention to employment and government deficits. That maintains the delusion that monetary policy isnt innately political and shaping all aspects of social and political life. But I digress…
Some bitcoin enthusiasts are upset with Ecuador’s move as they like to pretend that computer software can replace matters of governance, and that a pre-defined algorythym for currency issuance means we dont need to question whether issuance is either fair or useful. It is simply ridiculous to think that issuance to those with the most powerful computers is a valid form of issuance. It is equally ridiculous to ignore this question of issuance, and the resulting inequities in bitcoin distribution, because it might be inconvenient to one’s libertarian views, a rush to get rich, technotopian obsession or desire to smash the system and be proven right afterall (all of which are rather immature adolescent attitudes, which correlates with the pioneers of this space – sorry chaps!).
The main problem with the bitcoin boys is they dont base their enthusiasm on a coherent view of what’s wrong with money and what’s needed for socially useful currency innovation. To recap: currently national currencies are not issued by governments or central banks but by private banks when they issue loans. In most countries this is circa 97% of money in circulation. Think of the dollar, pound, euro and so on, and they are all predominantely issued for profit by private banks, not by either govenments or treasuries. Thats nuts for many reasons, environmental, social and economic (as my various talks and writings on this blog have explained). This simple fact is so stupidly overlooked by mainstream economists, financial journalists, its bizarre. Thankfully some like Martin Wolfe at the FT have now started breaking this taboo subject, as has the Bank of England’s own publications.
In response, we shouldnt see assets like precious metals as the answer, as this leads to contraction of economic activity and the cornering of the currency by the powerful, as it did in the past. A gold standard would be a disaster. Gold bugs have always struck me as a little odd in wanting to assert their personal power against a dangerous world.
But non-commodity currencies and non-state currencies should be issued not-for-profit far more than is the case today. Otherwise, we risk creating the same problems with our current systems where the ability to make money from money has led to an over-financialised economy that extracts wealth from the real economy and leads to gross inequality and unsustainable debt levels. That’s not controversial, as the UN has been describing this over-financialisation problem for the past decade.
Not-for-profit currencies can be issued by national or local governments or privately. So I am in favour of governments issuing their own digital currencies. For instance, state or city governments could issue a currency that they would offer to pay as wages, and could request tax be paid in it, or limit certain services to payments in such currency (e.g. business rates or car park fees etc). The power of a government to demand tax in a certain currency is a key way it maintains the value of national currencies at present. This tax-power could be used to enable an ecology of currencies that aren’t controlled by the banks.
It is clear that Ecuador will seek to spend the new currency into circulation, as wages for socially useful work. It is unclear what services or taxes they will price in this currency, or whether they will restrict payment options for some items in the new currency. To do so would be the simplest way to uphold the value of the currency, as it would mean there would be a market for people to buy it in order to pay for certain services or taxes.
Banning private currencies is compromising freedom but is Ecuador’s response to the potential for abuse and a concern they might lose further control of monetary policy and their tax base. Regulation rather than prohibition is the answer. I hope that after launching their own digital currency, Ecuador will revisit its digital currency ban and instead introduce rules for private digital currencies and related payment service firms. Any prohibitions on private currencies should not be applied to nonprofit community currencies or b2b credit systems, which are really useful coping systems for communities and businesses with cash flow problems.
Ecuador will face great technological challenges in protecting their new digital currency from attack by both financial and ideological interests. They had best get the best coders and also create paper records! Maybe some maturing bitcoin boys could help.