UPDATED 06:20 EDT / AUGUST 08 2014

Will the Ecuadorean ‘Bitcoin’ be the nation’s salvation?

medium_6661187237Ecuador’s economy has been in deep trouble since President Rafael Correa decided to increase spending on public works projects and social programs designed to reduce poverty. Though the intentions were good, the policy has resulted in depleting dollars for public spending and the amassing of a huge amount of debt.

To prevent an economic collapse, the National Assembly of Ecuador, the legislative branch of the government, recently approved amendments to the country’s existing monetary and financial laws, which include the creation of a state-backed digital currency which will then be used to pay off its debts while working alongside the US dollar as the nation’s official currency. The bill is now awaiting President Correa’s signature to be passed into law, but there’s no clue yet as to what Ecuador’s new digital currency will be called.

The proposed digital currency will be backed by liquid assets or assets that can easily be turned into cash if needed.

Will it work?

 

There are obvious doubts about this proposed state-backed digital currency, especially when members of Correa’s party are adamant that backing the new currency with an equal amount of dollars is not necessary.

The Bitcoin world is now waiting with baited breath to see how this liquid asset-backed currency will play out. Juan Lorenzo Maldonado, a Latin America economist at Credit Suisse Group AG, said that “If they find a way to make an efficient use of the electronic currency to manage just certain types of payments and make some procedures easier and faster, and they hold themselves on doing it responsibly, it may be a good thing.”

It’s one thing to use the proposed digital currency to pay off debts, but how will Ecudoreans feel about getting paid in this unnamed digital currency in the future?  Will they accept it like Bitcoin or start heading for the hills?

Stone Harbor Investment Partners LP economist Steffen Reichold has expressed his doubts regarding the Ecuadorean digital currency, especially when one considers the state of Ecuador’s economy.

“I wouldn’t want to be converted into a new currency managed by an untested central bank,” Reichold said.  “[It] isn’t straightforward, even when you’re in a country with a perfect track record of successful economic management, and I don’t think Ecuador is in that category.”

photo credit: stephen velasco via photopin cc

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