You may have heard the term "currency wars". We commented extensively about them in our article Currency War II. So far and up to this point, anarchists and crypto-anarchists believed that because of the distributed nature of cryptocurrencies and their impending upgrade to true anonymity, they were safe from government manipulations. This could not be further from the truth as we warned in our article You The Bank - The Future Of Cryptocurrency governments are there and catching up fast. The first step is to tax cryptocurrencies. The USA has already done that. The second step and the firing of the first official salvo of the new cryptocurrency war was executed on July 24, 2014 by the government of Ecuador.
Through a new law Ecuador banned all cryptocurrencies in their territory and created their own. This means that through a de-facto act of imposing an artificial monopoly the Ecuadorean government has prevented Ecuadorian people from being financially liberated from the tyranny of Central Banks.
This new law comes with steep requirements and penalties. All cryptocurrency operations in Ecuador must cease immediately. Those who defy this ban will be prosecuted and their cryptocurrency confiscated. There are also new regulations for the financial system, stock market and insurance companies.
HISTORY REPEATS ITSELF
Why would Ecuador do so? Because there is a new "nationalist" government in power who "must do something" about the terrible economic conditions. But in order to understand the full picture, we need to go back to 1932. That year the Sucre (Ecuadorian official currency) was pegged to the USD at 5.95 Sucres per USD. By January 2000, the exchange rate was 25,000 Sucres to 1 USD. This implies an inflation of "only" about 420.000 % over 68 years; this is, a destruction of savings of about 99.98%. In 2000 the Ecuadorian government dollarized the entire country, because it "had to do something" about the terrible economic conditions. Of course, as politicians need to continue spending to stay in their jobs but the Ecuadorian Central Bank was now prevented from printing Sucres, the economy did not get its "fix" of fiat money (funny money) and collapse (see for example Socialism - The Most Addictive Drug or Senseless Inflation And Interest Rates or Solving Country Defaults Through Printing or Central Banks Engines Of The Evil Empire and many others). The 2008 world-wide debacle (also engineered by the US Central Bank) did not help at all. It is now 2014 and Ecuador (along with the entire world) is in terrible economic conditions and "something must be done". This something is the return to funny money (fiat money) in the form of Ecuadorean cryptocurrency.
But before we move past this point, the clever reader has undoubtedly recognized something funny. Although the Ecuadorean government has gone full circle one characteristic remains: the terrible economic conditions of Ecuador. These conditions were not fixed by 68 years of funny money or 14 years of more-or-less stable (comparatively speaking) money. And what was the only constant throughout all those years? You guessed it: the Ecuadoran government making use of the unholy trinity (tax, borrow and spend). Therefore, once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth. The only thing that remains is the Ecuadorean government therefore it must be the culprit.
FIAT BY ANY OTHER NAME
And so the Ecuadorean government has decided that it needed to "stimulate the economy" through the use of their cryptocurrency which will be based on the "assets" of the Ecuadorean Central Bank (this is, USD). Furthermore, this new cryptocurrency will be "insured" by a deposit-guarantee system.
Hummm… if it looks like manure, it smells like manure and it is sticky like manure… it must be manure!
This new cryptocurrency will be….drum roll please…a fiat cryptocurrency! Yes ladies and gentlemen. Ecuador has the distinction to be the first country in the world to bring genuine fiat and truly debasable (i.e. government counterfetiable) cryptocurrency to the market. Who says that technological innovations do not take place in underdeveloped countries?
This new cryptocurrency will have the exact same characteristics as any other fiat currency in the world. The only difference is that manufacturing costs (printing) will be exactly zero. Other than that, this cryptocurrency will have the exact same fate as the now defunct Sucre (see for example Fake Money For A Fake Economy).
The Ecuadorian government believes that they can manufacture wealth by generating electronic cryptocurrency. They are, of course, overwhelmingly mistaken. We predict that Ecuador will go through yet another full cycle, but this time driven by crypto-inflation.
It is quite simple. Politicians will spend and what they have is cryptocurrency, they will spend it and then generate some more. There really is no change. At all.
CRYPTOCURRENCY WARS
What this announcement is going to do is to trigger a me-too domino effect of "national" cryptocurrencies. Every country in the world (or at least those in higher levels of desperation) will come up with a new, fully electronic, way to scam their citizens. Problem is, a non-exchangeable currency is of very little use and creates a mountain of economic problems. This means that all national cryptocurrencies will have to be "exchangeable" for other currencies and cryptocurrencies. Governments will debase these cryptocurrencies in an attempt to export economic stagnation to other countries. Those other countries will do the same in order to "protect" their markets against economic stagnation. Presto! Voila! Instant cryptocurrency wars.
It is inevitable. These new cryptocurrencies will have the exact same effect and outcome as any other fiat currency.
But hey! These wars will be fun to watch. Who cares if a great deal of people get scammed in the process. You see, dear reader, it is "for the greater good"… of politicians.
CONCLUSION
The problem with this new domino effect is that it is going to slow down the adoption of true and non-counterfeitable cryptocurrencies such as Bitcoin. And in so doing it is going to slow down economic activity at the world-wide level. However, there are good news indeed. The faster the world economic debacle grows, the closer will all be to a true political evolution towards Libertarianism. There is indeed hope!
Unless, this is, you like being hopeless. If that is your case, then please fill free to continue using fiat currency. One warning though, you won't be able to use cryptocurrencies in the washroom. Let it never be said that we do not provide public services.
Note: please see the Glossary if you are unfamiliar with certain words.
