In December 2014, Ecuador became the first country in the world to launch its own state-backed digital currency, the digital dollar.
While other digital currencies such as bitcoin already exist and are widely-used around the world, this is the first issued by a government
rather than a private operator.
Like other digital currencies and payment systems, it allows people to exchange hard cash for digital dollars, which are then stored in an ‘electronic wallet’ on their mobile phones. Payments are made via text message.
Ecuador has been using the United States Dollar as its hard currency since 2000, when it abandoned its own sucre, after that currency’s value collapsed from 7,000 to the dollar in January 1999 to nearly 30,000 at the start of 2000.
While the Ecuadorian government valued one digital dollar the same value as one US dollar,
the new currency has not enjoyed wide take-up, with only 8,000 people opening accounts in the three months after launch,
out of a population of over 15 million people. The government is unfazed, with David Duque, digital money analyst at the Central Bank of Ecuador saying, “We have not yet launched a big promotional campaign.”
The lack of a promotional campaign, coupled with a limited roll-out of locations where the new currency can be used has seen a limited takeup.
Real life application
Twenty-five year-old Lizette Abril opened a digital dollar account in January, but after four months had not made a single purchase with it: “I only know three places where I can use it.”
Maria, a vegetable shop owner, on the other hand, was completely unaware of it: “I had no idea about it”.
Karina Ubillus, a market stallholder in the capital of Quito does not believe it will work for her industry.
“Digital money is a terrible idea for the markets,” she said. “A lot of people here are illiterate and cash works just fine.”
While the Ecuadorian government has stated that the digital dollar is meant to make it easier for the forty per cent of Ecuador’s population without access to bank accounts to transact, it has banned other digital currencies, such as bitcoin.
Some analysts believe digital dollars could be used to increase the money supply in the heavily-indebted country and devalue its US dollar holdings, as a first step towards abandoning the dollar.
Lawrence White, an economics professor at George Mason University in Virginia USA, wrote that “it is hard to make any sense of the project other than as fiscal manoeuvre that paves the way toward official de-dollarisation.
The government has denied this
, pointing out that Ecuadorian law states that economic transactions are conducted in US dollars.
In a country where memories of the collapse and replacement of the sucre with the dollar are still fresh, the biggest hurdle the new currency faces is gaining widespread trust and use.
The government remains hopeful, with Mr Duque from the Central Bank of Ecuador saying, “We expect 500,000 active users by the end of the year.”
Whether this happens remains to be seen. Whatever the outcome, Ecuador’s nationalised digital currency makes for an interesting case study.
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