Friday, 1 August 2014

Ecuador cryptocurrency

Ecuador has banned bitcoin and announced that it is going to create its own cryptocurrency to be used alongside the US Dollar in the country.

Ecuador and all other countries have fiat virtual currencies. All countries transact their fiat virtual currencies 24/7, 365 days a year via the 70-year-old (or older) global fiat virtual currency very secure fiat virtual banking system. 92% of all the fiat money in the world is only transacted virtually. I think it most probably is done with values being sent encrypted. Thus 92% of all real money is transacted virtually and encrypted. The fiat virtual currencies are not virtual cryptocommodities (like bitcoin) created via blockchain technology: they are virtual representations of physical fiat currency banknotes and coins.
For Ecuador to create its own cryptocurrency it has to create a virtual currency fundamentally very different from the virtual cryptocommodity called bitcoin.
Ecuador does not have its own national fiat currency. It is a dollarized economy. It uses the US Dollar as its national currency for the sake of relative monetary stability. Thus, Ecuador is subject to inflation (erosion of the real value) in the USD as experienced in the US.
Ecuador is attempting something very unique. It has to create a cryptocurrency that is actually a monetary item or real money like the USD inside the US economy. Monetary items are all items in a country´s money supply. If an item appears on the list of items (cash, notes, coins, loans, bonds, etc.) in the central bank´s list of items that make up the money supply, then it is a monetary item. If not, it is a non-monetary item, like bitcoin. Monetary items are fiat money and subject to inflation and deflation. Money, i.e., a monetary item, is relatively stable in real value like the USD, Euro, Yuan, etc. Accountants actually assume money (all fiat currencies) is perfectly stable in real value for the valuation of many items in a business under the traditional Historical Cost Accounting model during low and high inflation and deflation. The items that accountants value in nominal assumed-to-be perfectly stable fiat value, include, but are not limited to capital, retained income, all profits, all losses, salaries, wages, rent, taxes, all expenses, trade debtors, trade creditors, all revenue, all income, all items in the income statement, cash, bank balances, money loan balances, etc.
Ecuador thus has to create a cryptocurrency with an assumed to be perfectly stable in real value per unit of cryptocurrency. That is not the case with bitcoin. Accountants in Ecuador are going to assume this new cryptocurrency (if they actually manage to create it) is perfectly stable in real value for the valuing/measurement of the above stated items in balance sheets and income statements of businesses in Ecuador. That is not the case with the crypto commodity bitcoin which is a variable real value non-monetary item, the real value of which changes minute by minute on the various bitcoin exchanges around the world. That is also the case with fiat currency when the fiat currency is transacted as foreign exchange, that is, outside the economy where the fiat currency is created. Inside the economy where the fiat currency is created, the fiat currency notes and coins maintain their nominal values fixed, but their real value is determined by the rate of inflation or deflation.
Bitcoin will never be assumed to be perfectly stable in real value (like all fiat currencies) for accounting purposes because it is not a monetary item.
Thus Ecuador is really trying something very special. Ecuador is going to try and do what bitcoin should have been, i.e., a monetary item or money. Bitcoin is a virtual cryptocommodity with a constantly changing real value.
I wish Ecuador good luck. If they succeed it will be something very special and may be a fundamental breakthrough that will have a fundamental impact on the bitcoin phenomenon.
Update: Ecuador´s (possibly [hyper]inflationary?) virtual IOU´s

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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