Ecuador: The First Nation to Create its own Digital Currency

Venzen Khaosan @venzen
July 31, 2014 18:39 UTC

Over the weekend, CCN reported on the government of Ecuador’s decision to ban Bitcoin, along with all other cryptocurrencies, via a National Assembly majority vote on July 23rd.

An outright ban placed on Bitcoin by one nation, or another, has always been inevitable. What is more interesting (and unexpected), in the case of Ecuador, is its concurrent announcement of plans to create its own national cryptocurrency.

Ecuador is small South American country situated in the Andes, between Peru and Colombia. The country’s booming mining economy and hydro-electric output is sizable and in 2013, Ecuador’s economic growth surpassed that of it’s giant neighbor, Brazil.

Glossing over the practical benefits such as a public record of government transaction, elimination of counterfeiting, reduction of public sector corruption, etc., the announcement is significant because it apparently defies two key principles of the cryptocurrency domain, namely:

  1. Can decentralized cryptocurrency be centralized?
  2. Could cryptocurrency function meaningfully once removed from the open sourced, community-owned Bitcoin model?

This commentary will focus on the technical and conceptual challenges posed by the Ecuadorian cryptocurrency proposal. However, before we explore these issues, let’s get the obvious politico-economic bugbear out in the open: With global central banking in trouble, Ecuador’s decision could not have been made on a whim and, in all likelihood, is not intended to maintain the global economic status quo.

Another Blow for Dollar Hegemony

Ecuador currently uses the US dollar as its official currency, and the new national cryptocurrency will be integrated alongside the Dollar. The National Assembly’s explicit intention that their central bank’s cryptocurrency “allow government to make payments in digital currency” makes clear their plan to a) institutionalize the use of a national currency for internal cash flow, and b) eliminate Dollar and foreign currency dependency.

The latter aim makes sense, not only in the context of the inevitable demise of the US Dollar as de facto international reserve, but also in terms of the difficult choice of its replacement. Does Ecuador lean toward, say, the Yuan, or toward whatever common currency the New Development (BRICS) Bank proposes? Establishing its own national currency – and a cryptocurrency, no less – is both courageous and defiant.

The repercussions of the “Cryptocentavo” (term used in this article only) as an official currency of a sovereign state will, no doubt, make waves in already troubled waters.

However, let us return to the more pertinent matter of how this cryptocurrency could possibly work.

Open Source Software and Decentralization

Ecuador’s strategic initiative comes in an era and domain (cryptocurrency) where the concept that underpins all developments is decentralization. As expressed by David A. Johnston in his seminal paper “Decentralized Applications“:

“Everything that can be decentralized, will be decentralized.”
– Johnston’s Law

Hence, the primary aspect of Ecuador’s national cryptocurrency plan that raises questions is the fact that it is state-run and, therefore, centralized.

How could Ecuador’s central government and Central Bank possibly integrate a technology dependent on decentralization if they blatantly seek to centralize, regulate and control it?

Background

Satoshi Nakamoto’s design of Bitcoin addresses the problem of digital double-spending by cleverly solving the Two Generals’ Problem (or Byzantine Generals’ Problem). Satoshi’s solution to double-spend is achieved via a self-organizing and time-based consensus record (the blockchain) shared and maintained by peer-to-peer nodes (the Bitcoin network).

For the consensus mechanism to work optimally, it requires that the network be as diverse and populous as possible. A network that is non-uniform and with a multitude of nodes representing different interests has the characteristic of being more decentralized than a network where, say, 25% or 50% of nodes are controlled by a few interests – or worst case scenario, a single interest. The quality of being decentralized (and distributed) is good for cryptocurrency, in that it lessens the risk of a few parties (or worse, a single party) dictating network policy and practice.

Many people feel that Bitcoin’s decentralized nature is its core attraction: it belongs to no-one, yet to everyone at the same time, which is part of Satoshi’s brilliant vision, and the shared “better money” continues to encourage the buy-in that had propelled Bitcoin from its obscure (yet inspired) origins.

“Cryptocentavo”

On the other hand, Ecuador’s national cryptocurrency will, by definition, be highly centralized and with a single party, namely the Central Bank of Ecuador, controlling the network.

Ecuador’s Central Bank Museum is about to gain some exhibits

As reported previously, Article 99 of the Ecuador national Assembly reform bill explains that the government’s Monetary and Financial Regulatory Committee will be responsible for the regulation of the digital currency while the Central Bank of Ecuador will be charged with its implementation and development.

Replacing fiat with cryptocurrency at national and international level seems like a natural progression and victory for Bitcoin until one realizes that the practical implementation places cryptocurrency squarely back in the domain of the Central Bank, which is very uncool. Or is it?

It can be argued that the implementation of an official national currency does not require buy-in since fiat – very low on sex-appeal, by the way – has historically been implemented by decree. For example, Lithuania adopting the Euro as official currency in 2015, or Australia having replaced the Australian Pound with the Australian Dollar in 1966. The example of Ecuador may just show us that the same dry, mundane roll-out can happen for a national cryptocurrency.

“Throw me the idol – I throw you the whip!”

Unlike the case of Bitcoin, where buy-in and increased adoption is critical to its continued existence, the cryptocentavo may “just work” despite not having the attributes of a consensus-driven, decentralized network and nada “be-your-own-bank” rebel-geek appeal.

Imagine the purely pragmatic benefits of having a national cryptocurrency that exists to “allow the government to make payments” and to involve more Ecuadorian citizens in digital currency payments. Its bureaucratic sensibility becomes clearer. In this context decentralization of the network may well be irrelevant, since the network exists only to serve government’s payment needs.

The cryptocentavo’s example of a centralized implementation of an essentially decentralized technology is going to be watched, internationally, with great interest.

While the majority of Bitcoin enthusiasts are waiting with baited breath for some Orwellian government authority somewhere “out there” to give them the Agent Smith nod-of-approval (approval that will never come), Ecuador had evidently gleaned enough from the brief story of Bitcoin story, to convince them that cryptocurrency is a good idea. So, what to do? Roll their own, of course.

Having banned Bitcoin, what will the proposed cryptocurrency be based on, and how will it be developed without Bitcoin?

The Open Source Software Model

Bitcoin is Free and Open Source Software (FOSS), exhibiting all of the associated characteristics: free to obtain, free to copy (hence altcoins), and with publicly available source code that is free of restrictive copyright conditions. Typically, FOSS licenses allow changes but enforce only that the software remains free and that its source code remains open (public). The FOSS development model is also open, in that projects, such as Bitcoin, are developed in a public and collaborative manner.

This community-based model of development has several benefits. The mass participation means that developers and users are contributing for reasons beyond sheer profit motive and their global collaboration, around the clock, means that security flaws and bugs are quickly fixed and that consensus steers collective effort.

Given the government of Ecuador’s decision to implement cryptocurrency whilst simultaneously banning its flagship, some dilemmas are raised for their project.

It seems highly unlikely that the cryptocentavo will it be based on the Bitcoin source code – having banned Bitcoin and snubbed its developers and community. Besides, with Bitcoin declared illegal, so, surely, is its source code.

Alternatively, development of the cryptocentavo may utilize existing libraries, which emulate the Bitcoin code. However, again, license stipulations impose that the resulting code be freely available, which essentially results in an Ecuadorian altcoin with all of the associated altcoin issues: vulnerability to DDoS, third-party collusion and price manipulation.

A third possibility is that the developers of the cryptocentavo write the required code from first principles, or rewrite the Bitcoin code at least. Yet, pursuing this course, how would they benefit from improvements and security fixes applied to the Bitcoin code? The cryptocentavo would forego all of the benefits of an existing Open Source Software project and have, in its place, a regional project with a smaller community that is always playing catch-up to the international standard.

Presumably, the National Assembly of Ecuador had been advised on these matters, and the exact nature and roll-out of their cryptocurrency experiment will become clear with time.

What’s more, South America’s developers are not slouches and have a reputation for being at the top of their game, so the capacity is there.

Conclusion

Besides representing a next-logical-step in the evolution of currency, Ecuador’s decision to adopt cryptocurrency must be driven, in part, by the many practical benefits of doing so. Reducing dependency on outmoded, cumbersome payment systems as well as reducing Dollar dependency are self-evident motivations.

Consider, too, that Ecuador’s central government has a self-declared socialist agenda, which changes the character of the event. Although any country can ban Bitcoin (and cryptocurrency), it is hard to imagine how the decision to implement a state-run cryptocurrency could have come from any European nation, for example. Regardless of national intentions, such a move would just simply not be sanctioned by the European Central Bank, due to its massive economic and political ramifications.

Despite all the talk about Bitcoin’s libertarian promise, it is an interesting outcome that a liberal socialist state should ban Bitcoin, implement it’s model and place it firmly in control of the state and its central bank. Extrapolating the example of Ecuador to the political arena of the West and it’s capitalist regulatory environment, may very well reveal the future of Bitcoin.

Will Ecuador’s central government and Central Bank be able to centralize cryptocurrency – apparently against its very nature? Perhaps a nation-specific implementation can tolerate such centralization.

Ecuadorian citizens are raising concerns around the matter of privacy. This article has not touched on the topics of privacy and anonymity that are so central to Bitcoin’s design. It is hard to imagine how a centralized network could (or would want to) guarantee anonymity. The matter remains open and up to the people of Ecuador to resolve. Perhaps Ecuador can deploy and run the national cryptocurrency whilst respecting its users’ privacy. Doubtfully, but perhaps.

The degree of openness of the Cryptocentavo, as well as the extent of community involvement in its development, remains unknown for now. Question marks also hover over the matter of foreign exchange: to what extent, if at all, would international partners and creditors accept the Ecuadorian cryptocurrency? It may well turn out that the usefulness of a centralized, government-controlled cryptocurrency stops at the nation’s border.

Ecuador Digital Currency and the Dollar – What are your thoughts?

Featured image by Shutterstock.

Last modified: August 1, 2014 08:10 UTC