Ecuador Turning to Virtual Currency
bloomberg.comWhat's virtual about it? I can't tell from reading the article. Is it virtual merely because none of it will be coins or bills?
Do other such "virtual" currencies exist, i.e. virtual merely because they only exist in ledgers and bank balances? I mean, other than the vast majority of US dollars and other traditional currencies.
All this talk of virtual currencies reminds me of how Europeans viewed Chinese paper money with suspicion when it was first described in The Travels.
Yes, most US dollars are "virtual" by their definition.
http://upload.wikimedia.org/wikipedia/en/5/58/MB%2C_M1_and_M...
There are others, like Stripe is currently developing and the former e-gold, but none backed by any government that I'm aware of. Norway mentioned plans to abandon physical money altogether, but no specific mention of a new, virtual currency. It wouldn't be any time soon anyway.
Given Ecuador's financial situation, this seems like a plan to print money to pay bills, and make that "virtual" money to saving on printing :-)
That would be incredibly shortsighted. Assuming it's not the case, it's still a reasonable move: they need to pay their national debts in American dollars. There's no need for countless dollar notes to be circulating throughout the country every day for intra-national commerce, anything else that would be inflated at most below US QE levels would do the same trick and release those USD notes from that task, hopefully sooner or later trickle them back to the national treasury in order to send them back to where they originated. Plans of mice and men, but they gotta give it a try. No country can afford to depend on the US national currency for too much in the long run.
Presume someone resorting to gimmicks to manage spending in excess of revenue is shortsighted (intentionally or otherwise.) Borrowing money in a foreign currency has pros and cons but I suspect most citizens don't realize the long term consequences.
My mom is Ecuadorian and I have lots of family there and happen to own property there.
Correa is a gr8 president, but coming from the perspective of someone like myself who is well read on the intricacies of modern monetary systems, sticking with the dollar for this long has been one of the few very bad policies. From a political perspective its understandable given Ecuador's history of currency devaluations. This move will very likely permit Ecuador to continue this economic miracle and transformation that has taken place(lifting many out of poverty, etc) . These changes should enable Ecuador to increase GDP , reduce unemployment further, continue to improve public infrastructure, increase standards of living, and become less dependent on exports to drive the economy. Hopefully, this will become a lesson to the entire world wherein electing leaders that are literate about economics and the functioning of the modern monetary system -Correa has U.S. PHD in Economics- , who don't use inapplicable house-hold analogies ( i.e. gov should run like house-hold) to pander to voters ( are you listening EU ? ) can make the kind of strides that policy makers talk about but never achieve.
Read 7 Deadly Innocent Frauds of economic policy[1] : 1) Government spending is limited by taxation and borrowing 2) With Government Debts we are leaving our debt burden to our children 3) Government budget deficits take away savings 4) Social Security is broken. 5) The trade deficit is an unsustainable imbalance that takes away jobs and output. 6)We need savings to provide the funds for investment. 7)It’s a bad thing that higher deficits today mean higher taxes tomorrow.
[1] From Mosler's book http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
Sounds like they're doing something closer to URVs [1] than Bitcoin.
At the same time, here in Argentina we invented the Convertibility: "One Peso equal to One Dollar" http://en.wikipedia.org/wiki/Argentine_Currency_Board The main difference is that here the pesos were always "actual" bills, but the real started as "imaginary" bills.
It worked initially (better than I expected), but we have an inflation that was 1% or 2% over the dollar inflation. So after 10 years we have a 20% difference in price, but we maintained the "One Peso equal to One Dollar" until it exploded. IIRC in Brazil the transition from 1-1 to 1-X was softer.
I've only been to Ecuador once, but it seemed like people in general didn't trust the government and thought it was corrupt. If that is the case, Ecuador's problems wouldn't be monetary or fiscal at all, it'd be that they have a bunch of crooks robbing them blind.
It always seems like it's my lay-about, heavy-drinking, multiple-DUI-offending, chain-smoking, new-car-on-lease-every-two-years cousins who have the most trouble with money. I once saw one of them chug the leftover half of a bottle of whiskey, smash it over the back of his truck (oblivious to the damage he did to the tail light) and scream, "That's how we DO!" Yeah, you have no idea how truthfully you speak, you idiot. And those three kids by two women you had out of wedlock are the ones who suffer the most for it. But "live fast, die young, and leave a beautiful corpse," amiright!?
If you don't get the analogy, my cousin is corrupt government, the kids are the people they govern. I'm not in general calling Ecuadorians drunken layabouts. And I'm not saying I specifically know this is the problem. I'm just saying, money is a communication of value, so if you have money problems, you most likely have value problems.
Perhaps a smarter idea for Ecuador is to take all of the USD they're circulating and convert it into an existing and proven cryptocurrency. While becoming the best place in the world for a unhindered exchange of USD --> BTC, they'd also not have to worry about all of the problems of building and administering a centralized virtual currency from scratch.
Imagine you buy a house worth 100k one day in bitcoin. The next day, bitcoin increases its value 25%. That same house is now worth 75k, but you still owe 100k plus interest.
This is one of the biggest flaws in bitcoin that people just can't seem to understand (or just don't _want_ to understand). You can't have a good loaning system with an unstable currency.
Edit: I posted a better explanation below:
"You take out a 100k mortgage in USD. Over the next year, the USD suffers suffers from extreme deflation (increases in value). It is now worth twice what is was worth last year. As a consequence, wages begin to go down. Now let's say you were earning 50k a year while paying down a 100k mortgage (not assuming a downpayment, this is for simplification). Next year, you are now being payed 25k but still owe that 100k mortgage. And the house is now worth 50k."
> The next day, bitcoin increases its value 25%.
Yeah because the Dollar was perfectly stable when it was five years old and accessible to only a select percentage of the population (how many people are really able to use a wallet with the cryptic addresses? Not my parents at least).
Besides, when many people buy their house in Bitcoin the market cap would be much higher and the price would not fluctuate 25% in one day. Not without a fatal flaw in the algorithm or World War III anyway.
The only reason Bitcoin is unstable is because it's not used by that many. That's not a flaw from Bitcoin, that's the network effect. Like Facebook versus Google+, though that's a bad comparison because G+ has no game-changing advantages, at least none that Facebook couldn't replicate.
That's not the ONLY reason bitcoin is less stable. The dollar is actively managed to be very stable over the short term.
Gold is pretty volatile compared to the dollar as well, and it's hugely traded.
Lending and credit are fundamentally, irreconcilably opposite to anonymity. It doesn't make sense to talk about taking out a loan in a decentralized/anonymous cryptocurrency system.
A reputation system (credit reports/scores) only works because each human who borrows money can have at most one identity. In an anonymous/pseudonymous system that cryptocurrency advocates want, I could take out a loan, spend it, and then take out another loan with a new pseudonym (or Bitcoin address) minutes later.
There is no threat of inability to get credit in the future. Even if you had agents willing to commit violence to coerce people to pay their loans (or, if we're in civilization, a state that will do asset seizures and wage garnishment with some semblance of due process) you wouldn't know who in the real world to point them at. Why would anyone lend Bitcoin?
If you were going to do that, you would need to verify government-based identity and use government to recover your money from deadbeats. In which case, why are you using Bitcoin anyway? At that point you could just lend the local fiat currency so your debtors could use it to buy Bitcoin (or whatever else they wanted.)
I don't understand. Did you buy a house in BTC or in USD? If you bought it in USD, then the value of it in USD hasn't changed. If you bought it in BTC, then your debt is in BTC. What am I missing?
OK, let me explain this better using USD.
You take out a 100k mortgage in USD. Over the next year, the USD suffers suffers from extreme deflation (increases in value). It is now worth twice what is was worth last year. As a consequence, wages begin to go down. Now let's say you were earning 50k a year while paying down a 100k mortgage (not assuming a downpayment, this is for simplification). Next year, you are now being payed 25k but still owe that 100k mortgage. And the house is now worth 50k.
If you bought it in BTC, the house is now much more expensive then when you originally bought it.
It's more expensive in USD, yes. Which is a problem if you're being paid in USD, instead of BTC. In other words: if your debt is not in the same currency as your income, that might be a problem. Is that what you're saying?
If it's the only currency in Ecuador, the price of a house in Ecuador in bitcoins doesn't have to match the fluctuations of BTC<->USD. If Ecuador also tightly controls exchange with foreign currencies (which they likely already control, just not tightly?), then they can make the value of bitcoins within Ecuador as stable as any other currency.
As for how they would acquire bitcoins in the first place, all they have to do is mine enough for most citizens to access them and then distribute them. Or fork off a new blockchain with a different cryptocurrency that can only be mined by the central government (say, because it requires private keys to mine that only the government controls).
The private key idea is a catastrophe practically begging to happen ;) They'd base their entire economy on the idea that at no point in the future a meager kb of data will not leak from a government or bank in a historically rather unstable country.
Bitcoin's designed to be decentralized, and I don't think it's possible to force Bitcoin into centralized control. If they are going with a virtual currency that's in their control their best bet is going to be a Ripple like currency, like the one Stripe backed last week.
Yeah, I know, it's just a stupid suggestion. :-)
There were many other online currencies proposed before bitcoins. The real innovation in bitcoins is decentralisation, so I suppose if you want to centralise it again, you can just throw out the whole blockchain idea.
It is suspected (and I think reasonably so) that Bitcoin volatility will decrease over time[1].
Regardless, I think with the financial tools we have developed in the past few hundred years we are very well equipped to deal with volatile assets.
Perhaps it is you who doesn't want to think longer about Bitcoin than the two seconds it takes to realize that loaning Bitcoins might be a difficult problem.
> Perhaps a smarter idea for Ecuador is to take all of the USD they're circulating and convert it into an existing and proven cryptocurrency
Not sure how that would be smarter. They can spend these USDs (obtained via exchange into their EcuNewVirtualFiat) to pay back their USD debt, or to buy BTC or Dogecoin. Now, which one is immediately smarter?
"No fiat lives forever", true, but most well-managed fiat lives long enough for the former to be a feasible and indeed smart move.
BTC is deflationary. Central banks will set stuff on fire to avoid deflation, but BTC is deflationary by design. BTC is dumb, basically, and unfit for being what wages are given and loans taken in.
Euro inflation is 0.2% or something like that and the ECB is not only demanding money for bank-to-ECB deposits, but giving away ECB-to-bank loans for free. Soon it's going to start buying government bonds. If that doesn't get inflation back to norm helicopter cash-drops are probably next.
This is EXACTLY what argentina did before the 2001 crash, by pegging ARS to USD @ 1:1. The problem is you lose the ability to set monetary policy because you can't set interest rates nor loan money via a central bank, when you don't own the currency.
The difference here is that the USD is much more stable than BTC.
> A monetary authority will be established to regulate the money
I suppose I should not have been so excited. The title really does read a "virtual" currency and not a cryptography-backed cryptocurrency.
This isn't what it sounded like, it's just like Paypal except the government is in charge.
You can have a cypto currency controlled by a central bank. In fact, we'll probably have them eventually. It would have a lot of the benefits of a cypto, like instantaneous transfer, without the drawbacks like major volatility.
Oh, boy.
I have a house in Ecuador. I am a fan of Bitcoin. And I am, on the whole, probably still a fan of Correa.
But ... yikes.
51% attack, anyone?
The article is scant on details the actual currency, but it doesn't sound like they are intending to make it decentralised nor a cryptocurrency.
It could be a proof-of-stake based cryptocurrency and the goverment would initially own the total supply.