Backed by liquid assets, the currency will initially rely on demand to dictate how much will enter the marketplace.
Ecuador is on track to become the world’s first nation to create its own digital currency. The country’s central bank announced last week (link in Spanish) that it would begin distributing the yet-to-be-named currency in December.
Backed by liquid assets, the currency will initially rely on demand to dictate how much will enter the marketplace, the bank explained.
Ecuadorian newspaper El Comercio reported (link in Spanish) that the currency will be circulated via the country’s mobile network. Analysts suspect the move is aimed at weaning the country off its dependency (link in Spanish) on the US dollar, which it has used as its official currency since 2000, following the 1998-99 banking crisis that destroyed the value of its physical currency, the sucre. The new digital currency will be valued as equal to the dollar on the universal currency exchange.
With public debt at its highest level since 2010 (roughly 25% of the nation’s GDP), Equador’s president Rafael Correa views the digital currency as a way to pay off debt and help poorer Ecuadorians, who are largely cut off from traditional banking.
But there are drawbacks. Digital money may be cheaper to disseminate and use without having to invest heavily in infrastructure and logistics, but it’s also more difficult for people to wrap their heads around and trust, according to Jeremy Bonney, product manager at Coindesk, a digital currency news site. “It may benefit some people but it’s going to be hard for them to get a really strong adoption rate,” Bonney told Quartz.
And there are hidden costs. A centralized digital currency (one controlled by a state’s central bank rather than market forces) may be easier to replicate and counterfeit, says Bonney, so it requires investing in protection from cyber attacks. For example, Bitcoin, the world’s largest digital currency exchange, relies on powerful computers and sophisticated cryptography to stay secure.
For now, the Ecuadorian government has banned Bitcoin in favor of a digital currency it can regulate. But if it can’t, a giant pile of physical dollars will be waiting in the wings.