Ecuador to Develop, Deploy First State Backed Cryptocurrency

After mortgaging most of Ecuador’s oil and gold to finance spending, President Rafael Correa is planning to create virtual money to pay the nation’s bills.

Congress last month approved legislation to start a digital currency for use alongside the U.S. dollar, the official tender in Ecuador. Once signed into law, the country will begin using the as-yet-unnamed currency as soon as October. A monetary authority will be established to regulate the money, which will be backed by “liquid assets.”

Less than six years after repudiating $3.2 billion of its dollar-denominated debt, Ecuador has dwindling oil reserves, with current-account deficits that are draining dollars from the economy and financing needs at a record. While using virtual money to pay government workers and contractors would help conserve hard cash, the currency may prompt Correa to boost spending even more and undermine the nation’s ability to repay long-term bonds, according to Landesbank Berlin Investments.

“This is usually the start of debasement, inflation and depreciation,” Lutz Roehmeyer, who helps manage about $1.1 billion of emerging-market assets at Landesbank Berlin, including Ecuadorean debt, said in an interview.

Roehmeyer, who’s been investing in Ecuador for more than 15 years and correctly predicted its last two defaults, plans to reduce his holdings of the nation’s debt. The firm holds some of the $2 billion of bonds that Ecuador sold in June.
Digital Currency

The Economic Policy Ministry declined to comment on the new currency and referred questions to the central bank. The bank’s press office also declined to comment and referred to a June resolution signed by the bank’s general manager, Mateo Villalba. The resolution says electronic dollars will be backed by liquid assets and can’t be swapped for government bonds.

Ecuador is developing its own electronic tender as digital currencies led by bitcoin have gained acceptance as a means of payment that have been promoted as a replacement for traditional money. Unlike Ecuador’s plan, most virtual currencies were developed as an alternative to government-backed tender.

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