With the big takeoff of Bitcoin, there is more and more talk of digital currencies. The latest talk comes from Ecuador, where the government plans to have the central bank issue a new digital currency.
Ecuador currently uses the U.S. dollar as its main form of money. Like most South American countries, Ecuador has had currency problems, or perhaps more accurately, inflation problems. It had to turn to the U.S. dollar in 2000 for some stability.
It is still unclear if the new digital currency will have a floating exchange rate with the dollar, or if there will be some kind of a fixed rate.
While it might sound good that Ecuador will have a currency to compete against the U.S. dollar, I fear that the government there has other ideas up its sleeve.
First, we must realize that this new currency will not be like Bitcoin. While I have my doubts about the long-term viability of Bitcoin, at least it is a “private” currency, in the sense that it was not created by a government and it is not run by a government. Nobody is forced to use it.
In addition, Bitcoin was purposely designed so that its supply would be limited. You can “mine” for bitcoins, but it gets harder and harder, and the new supply gets more and more limited. There is a finite limit to the number of bitcoins.
While we don’t really know yet how this new digital currency will work in Ecuador, we can take a pretty solid guess that it won’t be limited in its supply. When has this ever existed with any government-issued currency that was not backed by a precious metal?
Still a Fiat Currency
Just because this will be a digital currency, it will still be issued by a central bank. It will still be a fiat currency. It will just be in digits.
In many ways, the U.S. dollar is almost a digital currency. You can get actual dollar bills and coins, but actual paper money and coins makes up a small percentage of the actual money in circulation. Most of the money exists in the form of digits in bank accounts and brokerage accounts.
When referring to the Federal Reserve’s monetary inflation, we often say that they are printing money. But in most cases, this isn’t really true. They are really just creating digits on a computer. It has essentially the same effect, so I call it digital money printing.
Another concern about this new digital currency in Ecuador is that it may be used as a further step to prohibit privacy. While a lot of Bitcoin advocates like to cite privacy as one of its advantages, I believe it can really be the opposite. When you buy or sell something and use electronics to make or receive payment, then there is an electronic trail. And we all know what the NSA is up to these days. If it can track emails, then electronic payments are probably not out of reach.
The best form of privacy is using cash. There is a reason drug dealers don’t write checks or use credit cards. So we really have to ask ourselves if we want the government knowing all of our personal transactions. When your kid mows the neighbor’s lawn for twenty bucks and receives his payment in digital currency, then he better be sure to pay his income taxes on that.
If any country is really serious about competing against the U.S. dollar, then it can do a couple of things. First, it can stop inflating its own money supply. Second, it can back up its currency with gold or silver.
Actually, there is a third option that is almost never considered. The government can step out of the way and let the free market decide what to use for money. Gold, silver, Bitcoin, and anything else can compete. People can freely choose what to use. It is likely that the top one or two choices will be widely used and accepted.
Until then, don’t trust these new government schemes. Politicians in Ecuador want to spend money, just like everywhere else. They are looking for a new source of funding and we can bet that they will use this new digital currency to inflate, just like we see with every other government-backed fiat currency.