A new law prohibiting the use of cryptocurrencies has laid the groundwork for a new state-backed digital currency to come into effect alongside the dollar in Ecuador
Following the recent success of cryptocurrencies such as Bitcoin and Litecoin, Ecuador’s President Rafael Correa looks soon to sign into law a government-backed digital currency to come into effect alongside the US dollar as the country’s official currency. With an anticipated budgetary shortfall of some $4.5bn come the end of the year, it is hoped the new digital currency will allow the state to more easily balance its books and restore an air of stability to the debt-ridden economy.
A bill signed into law at the end of July also prohibits the use of any digital currency other than the one proposed by government, putting a stopper on the country’s existing cryptocurrency activity. Under the new law, those found guilty of violating the ban on cryptocurrencies could face criminal prosecution and any offending currency will be confiscated.
The proposed digital currency, however, could reduce the funding gap
In stark contrast to existing cryptocurrencies, the new digital currency will be controlled by the state and backed by liquid assets. ‘The digital-currency system must be verifiable, and its code must be published as free software, to ensure the system’s privacy through algorithms,’ read a statement issued by Bitcoin Comunidad Ecuador.
Much of Ecuador’s dollars are tied up in either debt or its dwindling oil and gold reserves, fuelled primarily by state spending, which has increased more than threefold since Correa came to office in 2007. Measures taken so far by the government to reduce the deficit include taking out a $2bn loan and selling the same amount again in debt, using the country’s oil and gold reserves as collateral. The proposed digital currency, however, could reduce the funding gap, provided the country finds an efficient and responsible way of utilising the currency in selected payments.
‘Electronic money will stimulate the economy; it will be possible to attract more Ecuadorian citizens, especially those who do not have checking or savings accounts and credit cards alone. The electronic currency will be backed by the assets of the Central Bank of Ecuador,’ read a statement issued by the National Assembly.