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.
3 thoughts on “Ecuador’s helpful knee in the balls of the Bitcoin boys”
I’m not sure it’s a kick in the balls for bitcoin.. after all, all the Ecuadorian government have done is copied and pasted the bitcoin source code and called it something else. It’s a compliment. However, I think I’d have more trust in the bitcoin developers than the Ecuadorian government coders.
Paypal has just announced it is going to integrate bitcoin as well.. Another huge step forwards and seal of approval.
Jem, I’ve not yet studied the details of Ecuador’s new currency so I can’t say what it might or might not achieve, but you make a couple points in this fine article that I wish to comment on.
You say, “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.”
I wholeheartedly agree. As a currency, Bitcoin represents a step backward to commodity money in the evolutionary process of reciprocal exchange. Money is first and foremost a medium of exchange, a “place holder” that is supposed to assure that a seller of real value who accepts money as payment receives back as much value when s/he becomes a buyer.
The best thing about Bitcoin is that it has opened people’s minds to the reality of payment media and mechanisms that do not depend upon banks and governments.
You also point out that, “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.”
Right on. Legal tender laws force the acceptance and use of political currencies that are continually debased by improper issuance (like the monetization of government bonds, which amounts to the issuance of counterfeit money under color of law.). If legal tender were abolished, political currencies would have to compete in the market on their own merits as credit instruments, and central governments would no longer be able to go ever deeper into debt by profligate spending. Power would shift to the people.
But, as I point out in my presentations, there a few additional factors that make established political currencies dominant in the market, including the following:
Universal acceptance within wide domains (national or global).
Easy exchangeability (well developed currency exchange markets (forex)).
Inertia – The public is habituated to their use.
Lack of alternative exchange media.
Recognition by, and support from governments—legal tender laws, restrictions on competitors.
Their true costs and “side-effects” are obscured and unrecognized.
But we have at hand “disruptive technologies” that will ultimately displace the outmoded and destructive dominant mechanisms for mediating exchange of value.
Excellent piece, Jem. Seems like countries in South America are more willing to be trail-blazers: first with cannabis, and now copy-cat-bitcoin. At this moment, there are 478 crypto-currencies (CC); back in February, when I started buying bitcoin and others, there were 254. I guess there is no limit.
Yes, it makes no sense for Ecuador to ban other currencies. The beauty of CC is freedom from banks and their fees (particularly) and government. Ecuador must reconsider and regulate, as you say.
Acceptance of CC across wide sections of economies is growing, from basic retail through to complex financial insurance. Great to note above, from Anthony Wood, that Paypal is soon to accept bitcoin. That could well be a major game-changer.