[Cryptography] digital currency is currency - Ecuador

[dan at geer.org]

[possibly OT except for the question "What is a digital currency?"]

http://hosted.ap.org/dynamic/stories/L/LT_ECUADOR_DIGITAL_MONEY

ECUADOR HERALDS DIGITAL CURRENCY PLANS
BY GONZALO SOLANO 
ASSOCIATED PRESS

QUITO, Ecuador (AP) -- Ecuador is planning to create what it calls
the world's first digital currency issued by a central bank, which
some analysts believe could be a first step toward abandoning the
country's existing currency, the U.S. dollar.

The electronic money, which Central Bank officials say they expect
will start circulating in December, does not have a name and officials
would not disclose technical details, though they said it would not
be a crypto-currency like Bitcoin. The amount of the new currency
created would depend on demand.

Deputy director Gustavo Solorzano said it is to exist in tandem
with the greenback and, by law, be backed by `'liquid assets." It
would be geared toward the 2.8 million Ecuadoreans - 40 percent of
participants in the economy - too poor to afford traditional banking,
officials say.

Initially, it will be able to make and receive payments on cellphones,
Solorzano said. Such mobile payments schemes are especially popular
in African nations including Kenya and Tanzania, where they are
privately run.

The new currency was approved, and stateless crypto-currencies such
as Bitcoin simultaneously banned, by Ecuador's National Assembly
last month.

Leftist President Rafael Correa has said the project's only problem
is that it has taken this long, defending it against `'pseudo-analysts
who have appeared in the media trying to smear (it)." He denies any
plan to replace the U.S. dollar, which Ecuador set as its currency
in 2000 after a crippling banking crisis.

The official in charge of the new currency, Fausto Valencia, said
the software is already used in Paraguay by cellphone companies.

He said it is not like Bitcoin, whose advantage is in its technical
underpinnings: Only a limited amount of Bitcoin can be minted.
Without that safeguard, economists have warned, a government could
theoretically create as much as it wants, risking inflation.

Nathalie Reinelt, an emerging payments analyst with the U.S.-based
Aite Group, said she does not understand any other motivation for
creating such a currency than to allow Ecuador to increase its money
supply and, essentially, devalue its U.S. dollar holdings.

`'It is far too early to know how they are thinking of making the
electronic money work," said analyst Juan Lorenzo Maldonado of
Credit Suisse LLC.

Some believe it could be a first step to abandoning the U.S. dollar,
Ecuador's currency since January 2000. Correa denies it puts
dollarization in peril.

His government has tripled social spending, and opposition lawmaker
Ramiro Aguilar says it `'has a serious fiscal liquidity problem.
It needs money ... It doesn't mint money. It has no control over
what circulates."

The state is currently $11 billion in debt, mostly to China, which
buys most of Ecuador's oil. It recently sold $2 billion in bonds
with a 7.95 percent return, as well as obtaining another $400 million
from Goldman Sachs in exchange for part of its gold reserves.

Use of the currency will be voluntary and it will not be used to
pay public employees or state contractors, according to the law.
Nor can it be used to buy financial instruments the Finance Ministry
emits.

Some question whether Ecuador's Central Bank is constitutionally
empowered to create such a currency.

`'Let's remember that the Central Bank has no autonomy, and this
could lend itself to all manner of political maneuvers," said
independent political analyst Jaime Carrera.

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