Ecuador's 'Dinero Electrónico': The First Attempt to Issue a Central Bank Digital Currency
Central Bank Digital Currency has a predecessor during Rafael Correa's presidency (2007 - 2017) in Ecuador. The failure of Correa's project leaves important lessons behind.
In a recent paper, Aruaz, Garrt, and Ramos (2021) discuss the Dinero Electrónico (DE) case in Ecuador during Rafael Correa’s presidency. Their paper is interesting for three reasons. First, their work is the only (if not the only) one dealing with Ecuador’s DE. Second, Ecuador’s DE can be considered the first attempt to issue a Central Bank Digital Currency (CBDC). Third, DE became available to the public in February 2015; but it lasted only until March 2018.
Despite the novel characteristics of DE, it remains an overlooked case by recent research on CBDC.1 Yet, its failure provides important lessons for contemporary studies on CBDC.
The motivation behind Ecuador’s DE
To understand DE's motivation, we first need some context on Ecuador’s economy. Because of a financial crisis and to avoid hyperinflation, Ecuador dollarized the economy in January 2001.2 Rafael Correa, an iconic 21st Century left-leaning populist, became President in 2007, remaining in office for 10 years. As Sebastian Edwards (2019) states, left-leaning populist governments typically use their central banks to monetize their spending policies. Because of its dollarization, this fiscal dominance is not possible in Ecuador (p. 90). Correa revealed that dollarization was a binding constraint when he famously stated that dollarization is like committing a “monetary suicide”. One can only wonder what Correa (a populist powerful enough to reform the constitution to his benefit) would have done with a central bank at his reach.
It is probably no accident that Correa launched DE in 2015, as the country risk premium of Ecuador rose from 510 to 1000 basis points. As Larry White points out, rather than trying to rip the theoretical benefits of a cashless economy, Correa was looking for a cheaper financial resource to avoid the high premium attached to its sovereign debt.
The DEs were digital tokens convertible to US dollars, and the central bank was the monopolist provider of the digital wallet needed to trade with DEs. To foster DE’s adoption, the government banned the use of cryptocurrencies such as Bitcoin. The treasury could borrow with a low (or null) interest rate reserves from the central bank if the public uses DEs instead of US dollars in their daily transactions.
Besides the rise in the country's risk premium, two other facts support this interpretation. The first one is that Correa reformed how the central bank reports its balance sheet, reducing its transparency. The second one is that Correa seized reserves held by commercial banks. If actions speak louder than words, Correa’s actions show he was indeed behind private sector resources.
The government expected that in 2015 there would be 500,000 DE accounts. By 2018 there were 410,000 accounts, of which only half were active. This was not enough to cover the expenses of supporting and managing the DE. There is no accessible data (as far as I can tell) on whether the government required state employees to open DE accounts.
Why did DE fail?
It is no mystery why DE failed. Trust is a crucial component for a convertible note (digital or print) success. Correa’s government was the opposite of a trust-building administration. Even representatives of Correa’s political party in Congress refused to be paid in DEs, favoring their wages in US dollars.
Correa confirmed the public distrust when he forced commercial banks to repatriate their reserves held abroad and have the central bank lend $5.8 million to the treasury and state-owned banks.
Some lessons
The DE project did not collapse because of a crucial shortcoming in its technical design. The DE project collapsed because of a lack of trust on the issuer, Correa’s administration.
This is an important lesson for other central banks considering launching their CBDCs. A consistent technical design is not enough if there is no trust by the public in the first place. Central banks such as the Federal Reserve face two problems in the trust department. Lately, central banks are not at their prime time in terms of prestige. The recent trend towards the politicization of monetary policy is a recipe to erode the trustworthiness of monetary institutions.
For instance, this literature review by the Federal Reserve and this paper by the Bank for International Settlements do not comment on Ecuador’s DE. We discuss the case of DE in this working paper, but it is not the main topic of our paper.