Andrés Arauz is easily one of Latin America’s most innovative and brightest politicians on the left (and he is only 36!). Among his many accomplishments – which include stints in Ecuador’s central bank and various ministerial positions in the government – he was one of the architects of the country’s early foray into digital money. It was a truly radical experiment; with all the crypto hype, it has not received the credit it deserves.
Even though Arauz narrowly lost the run-off of Ecuador’s presidential elections in 2020, his vision for a more democratic digital economy – tied to the reformed and democratized central bank running its own digital currency – is only more relevant today. The interview that follows was conducted by myself and Ekaitz Cancela; it probes Andres’ views on Bitcoin, the broader world of crypto & NFTs, how to think about digital and monetary sovereignties together, the geopolitics of the global payment systems, China’s efforts to control FinTech, the situation in El Salvador, and the possible ways to democratize central banking.
On a personal note, let me add that I have known Andrés for years and I vividly remember meeting him in Quito, in 2016, in the last years of the Correa administration. Whatever its flaws, that government, represented by people like Andrés Arauz, Guillaume Long, René Ramírez Gallegos and many others, had a commitment to thinking finance and technology together – and doing so from the left. That’s a lesson that many progressive movements in the Global North have still to learn…
~ Evgeny Morozov
Keywords: Electronic money, CBDC, monetary sovereignty, payment systems, international hierarchy of money
FINANCIALISATION OF EVERYTHING
In the Global North, there's now a lot of buzz around NFTs, tokens, DAOs, and other blockchain-related innovations. There is a strange type of leftish populism attached to them; to quote, almost verbatim, one prominent American venture capitalist, everything is already financialised – so stop complaining and get in on the action; we all should find a way to leverage the ongoing financialisation to our own advantage. What do you make of such developments and their political potential?
It's important to understand these processes in the context of the 2008 global financial crisis, as they not only gave birth to Bitcoin and everything else that came after, but also to quantitative easing and unconventional monetary policies. So this money creation by the central banks seemed almost infinite – until the pandemic turbo-charged it even further.
All this money has not been going to real-life usages, such as the caring economy, the productive economy, or agriculture; it wasn't much used to upgrade our energy system, etc. So, the money is going elsewhere. Some of it goes to the Dow Jones and the stock markets. Some of it flows to completely new uses in the cryptosphere, such as NFTs. The NFT-isation of feelings and emotions is somewhere on the horizon already.
It is really difficult to fight financialisation when the underlying policy decision around the world is 'man, let's just keep on putting money into this thing'. Because otherwise, if you stop pedalling the bicycle, it falls. Just keep throwing money at the system until something happens. It's such a big bubble that there's no willingness to burst it, so it will keep going until something radical happens, which probably will be a global war or whatever. Thus, the sellers of NFTs and innovative cryptocurrencies will probably keep succeeding so long as the underlying policy decision is to continue throwing money at the system.
If we talk more about Generation Z, unfortunately, I'm starting to see a lot of hype in the young people of Latin America, who finish high school and college, but they don't want to know anything about real and productive work or about designing something physically real or mechanically challenging…
Those things are completely out of question and all they talk about is how to come up with their own NFTs, or buy some Bitcoin so that they can make some money quickly in the short term. And that's losing a giant pool of talent, human beings that are very smart, that are putting their efforts into basically continuing the process of financialisation within our own Ecuadorian dimension, namely, offshoreisation.
Do you think it makes sense for progressives to try to ride the tiger, so to say? There have been some experiments in the Global North – like the Economic Space Agency – that at least gesture in that direction. There are philosophers and serious thinkers on the left, e.g. Michel Feher in Belgium, who argue that the struggle is no longer inside the Volkswagen factory but inside the Robinhood app. Do you think there is something truly progressive in such experiments? Or are they just a distraction, a cheap and populist kind of revenge, which distracts from structural change?
Three things in this regard. First, individual leftists, as any human being, can play in the casino, and maybe they can win some money every now and then. If you're a leftist trying to understand this thing, you may be smart enough to make a few moves and win some quick money. So, I don't see a problem with individually acting to make some money. Of course, in the end, it will be converted back to fiat, because that's when you win. If you keep it in the speculative sphere, you might still lose it, of course.
Second, as leftists, we have to understand what's going on, instead of ignoring it. And the ignorance on the left about these issues genuinely worries me. Because the left says 'oh no, I don't like Bitcoin, I don't like NFT's. Finance, banks... that's bad'. Well, we have to actually understand the inner workings of this system. One positive thing about the crypto world is that it also helped to popularise finance in such a way that more people can also understand other types of financialisation that are not driven by crypto. This doesn't seem like a bad thing.
For example, what the fuck are they doing with the derivatives for oil, wood, grain, or food? They're even financialising water. So we should use this popularisation of the speculative bubble brought by the crypto world to try to better understand financialisation in the conventional world. And that should be a major task of the left.
And then the third part, again, why don't we win? If we're playing with the rules of the game of financial capital, there's no way we're going to win that fight. So what we have to do is continue our battle for the gatekeeper institutions that manage governments, that set the standards and the rules of the game, that define who is going to win the struggles.
There are institutional investors, but who regulates the international institutional investors? We have to change the laws, we have to take over the central banks, we have to make sure that people working as financial regulators are people that are decent and not corrupt, that are not going to be taken over by the private banks... We need to start demanding conflict of interest regulations for people that are in charge of these institutions.
FROM MONETARY TO DIGITAL SOVEREIGNTY
What is the link between monetary sovereignty and digital sovereignty, as it seems that the fight for one is also the fight for the other? What would that mean in terms of policy on the ground for a country like Ecuador, but also internationally? Also, what does it mean in terms of the ownership of the stack, data ownership, antitrust law? What are the policy consequences of seeing these two types of sovereignty as intertwined?
Financial data, the data of money, as I have called it, is a key issue and countries should assign all available resources to build digital sovereignty over it. I won't go into the case of Ecuador, because it's too small of a country to try to do that. India, however, did issue domestic obligations around financial data. They told Visa, the credit card company, that if they wanted to keep working in India, all of the financial transaction data of Indian citizens paying with India-issued Visa credit cards, have to be in the stacks of India. And there has to be some surveillance, monitoring and complying with the standards issued by the Indian government, they have to be physically located here, so you have to have Indian staff regulating it, so they have to be liable in terms of requests of information by the criminal investigative authorities.
Of course, this changes the game because, all of a sudden, the data becomes an asset of the domestic economy. If used wisely, with the correct anonymisation, common property, and privacy by design, this can be leveraged for an entire system of knowledge and can be used by academics, civil society, government institutions, the private sector, etc. to come up with more and better services for society. Furthermore, you avoid the monopolisation of all this data by external actors outside the domestic economy.
Something similar, but not successfully, has been tried in Brazil. Obviously, what has been applied in China went a step further, not just with the domiciliation of the data, but with their own applications and interfaces. So, thinking about the future of digital sovereignty, we have to think about the political economic aspects not only of the data of financial transactions but also of the key messaging services and even of user interface applications. That's something that has to be done if any country wants to keep a little bit of decency and dignity.
China's putative successes in this sphere have been widely criticised in the West. It can, of course, also be seen as an experiment on using the much-maligned Social Credit system to disconnect from the US-dominated global economy. Even FinTech companies used it for promoting financial inclusion, which is one of the key points of your work. So, do we have something to learn from China?
Yeah, we definitely have to learn from China, because this is something that is working, and it has been working for decades. The Chinese government, on entering the WTO in the early 2000s, successfully lobbied for delayed introduction of foreign credit cards into its markets. That's why China has a Union Pay monopoly. And they have been very smart about the standards, especially inside the banking and merchant systems, that they demand compliance with.
Now they have their own credit card system that's digitally sovereign and state-owned. This system can also be projected internationally. Why do so few countries in the world object to accepting Visa and MasterCard as payment providers? How can there be no alternatives to their monopoly? Of course, there can be, but we have to imagine and build them in a smart way. Obviously, governments play an important role here. You can't just privatise money, you have to exert some proactive policies on behalf of governments to build on digital sovereignty and financial sovereignty in the payments sphere.
Of course, the same thing has been happening with Chinese providers like AliPay, or WeChat. They are now basically surveilled by a clearinghouse of the Central Bank, the People's Bank of China. In that way, not only the data, but also the policies on how this is being deployed in the country, are being monitored by the government.
My intent here is not to justify the totalitarian aspects that may be exerted by the Chinese Communist Party. Just that there are solutions to global (and mostly US-led) monopolies if you design this payment system appropriately and use anonymisation techniques.
ECUADOR’S DIGITAL MONEY
As a politician, you have been extremely enthusiastic about using digital technology to achieve progressive aims. While in office, you introduced state-managed digital money in Ecuador, what today we might call Central Bank Digital Currency (CBDC). You represented a progressive administration with a clear leftist agenda. Could you explain the rationale behind the digital money initiative? What progressive ends was it to serve?
This adventure started in 2009 as the global financial crisis was raging on. We were expecting the Ecuadorian economy to tank, with a balance of payments crisis following shortly thereafter. As a dollarised country, we depend on the inflow of dollars – they are literally shipped to us from the Federal Reserve office in Miami on a plane. We were afraid that, because of the crisis, the influx of dollars was going to freeze, especially as our export earnings were collapsing.
First of all, we thought that we needed a domestic means of payment. And because we are dollarised, we knew that leaving the dollar and replacing it with a national currency was not going to be possible for political reasons. What is the best way to have domestic means of payment without the dollar rising?
Obviously, the alternative was an electronic currency. At the time, we called it mobile money, and it was inspired by the Kenyan and Philippine experiments. Then we decided that it couldn't just be a project made by telecommunications firms, and therefore, in its design and regulation, it had to be part of a monetary project pursued by our central bank.
The second reason had to do with the political economy of the payment system itself. It was clear to us that if we granted a Central Bank account to every citizen in Ecuador, we would be able to break many of the domestic monopolies operated by the large private banking sector. And it would allow massive financial inclusion in the short term. Having every citizen open an account was, in a way, an effort to modify the relations between the private banks and the government.
The third reason had to do with our political efforts to transform and re-design the central bank from an elite institution to a popular institution. If the central bank, all of a sudden, starts opening accounts, where every citizen in Ecuador, whether rural or urban, rich or poor, young or old, man or woman – financial inclusion for women is more difficult – then this could help democratise the central bank. If people started to wonder and say ‘what is this thing, the central bank that gave me an account…’, again, then people would start talking about this institution at the dinner table, during breakfast on the street, on the bus…
Just having that discussion on what the central bank should improve, which regulations are good and which ones are not, even the more critical discussions on what the state is doing with their money and data – for us it was a huge success because that discussion would inevitably lead to a more democratic nation. In the end, the central bank could come out of the shadows, no longer being the institution of the elites, with their exclusive knowledge, but of regular citizens, with their folk knowledge.
Not only is Ecuador the first country to have implemented central banking digital money but its central bank was also the first to publish the standards of the digital money platform and develop an API so that citizens could develop new solutions for financial access in rural areas, transportation, web applications, among others. Could you tell us about that experience and the motivation behind it?
This was, perhaps, one of the most beautiful and promising parts of the electronic money system that we designed in Ecuador. We were committed, even though it was a challenge, to making it an open innovation system where the central bank would make its API available. We wanted developers from universities, businesses, and so forth to connect to develop better applications and platforms, so that the electronic money could flow around the country. And this was successful. We organised a 48-hour hackathon with several teams from all over the country and in two days they came up with 14 prototypes: from electronic money that can be used by citizens with a fairly primitive USSD type protocol of transferring money by mobile messages to an app with Near-Field Communication for paying the daily bus fee.
There were other examples of inclusivity, such as platforms for people with disabilities, which were visually impaired, and could use the payment system with audio help. And many, many others, including initiatives for the cooperatives, etc. So in 48 hours we showed that the talent pool there was immense. All we had to do was to make a public good widely available through an open API.
This is the way to go if you want to have true FinTech that's not based on privileges or depending on big banks. You shouldn't just have CBDCs with a central bank developing the app, the protocols, the payment services. I can't imagine a central bank, having an office full of customer service agents trying to install services and POS systems on every bus in every country. No, it can't be that kind of thing. It has to be a platform-type open service, so that many innovators, businesses, and other institutions can hop onto it and take advantage of a centrally universally available platform.
What is one thing that you think you should have done differently in the Ecuadorian digital money scheme?
Perhaps, that we did not add a lending dimension to our system. This is called Nano lending, an even smaller dimension than micro lending, which is basically to lend a citizen 30 bucks or 50 bucks or 100 bucks with an indefinite term to pay back, which can be 10 years, 30 years, 50 years, and then have that nano lending be available within the electronic system platform, so that when money is needed to be created, it could be created, and money could be circulated around within this system as a means of payment. That’s a true alternative to the conventional banking system.
GEOPOLITICS OF PAYMENT SYSTEMS
Your early work grasped some of the counter dynamics to many processes that are celebrated rather uncritically. Somehow, established institutions, especially those of the global financial system, often survive many of the challenges to their hegemony. How do you assess the early institutional response to cryptocurrencies and what is driving it?
First of all, the advent of Bitcoin changed the system in many radical ways. Even if it quickly became a speculative instrument, its considerable payment benefits are still there. Somebody buying Bitcoin in Thailand can cash it out in domestic currency in Peru without touching the big banking institutions. That's a big change.
The cross border payment dimension is the critical part. Bitcoin is shaking the foundations of the existing system to the point where Swift is worried about losing its monopoly over cross-border payments. Swift, of course, is the cooperative owned by the large private banks. This system channels most of the world's cross border transactions by the large correspondent banks of the world, like JP Morgan or the Wolfsberg Group, which is the group of 13 global banks that do international transactions by the Financial Stability Board.
If you add the geopolitical dimension, then you see that the US government and the Belgian regulators had basically full knowledge of cross border transactions. Once you create an alternative, such as Bitcoin or other cryptocurrencies, that allow for international cross border payments that are not registered in the Swift database, then the central parts of the capitalist system start to get nervous. That’s the reason why they decided to create these alternatives like TransferWise or PayPal; one can also look at philanthropic initiatives such as the Better Than Cash Alliance, which includes Visa and MasterCard among others, which aim to reduce the use of cash (like crypto, it, too, is hard to trace).
International institutions are also making a big deal out of this. The European Central Bank (ECB) is saying that the alternative is just a CBDC but JP Morgan says that, maybe, since they are the largest bank in terms of international transactions, it's better to have the JPM Coin (a private coin issued by the bank) doing that job. So there are many initiatives that are happening, but they're all in response to Bitcoin.
How do you see the entrance of companies like Facebook into this space? Do you think there is still some future for Facebook's Libra – or Diem as it is now called? Or are those efforts failing?
I definitely see a future for all of this. Some are optimistic about the ability of civil society to defeat Facebook. This, however, misses the big picture: Diem is a geopolitical effort on behalf of the United States to preserve the hegemony of the dollar. And if Facebook fails, someone else – PayPal or Google – will do it.
The recent Congress hearings show that the US needs to come up with a solution for the rise of China. Chinese e-money payment systems have emerged successfully, initially with the support of private capital but gradually re-centralised in a state-led sphere. However, the internationalisation of these instruments will soon reach a global scale thanks to Chinese FinTechs such as Alibaba, Baidu, and Tencent. Facebook has the tool to confront them and extend US hegemony, WhatsApp, which is already something of a global good, even if it is not public.
Apart from China, what other geopolitical considerations should we bear in mind as we are thinking about the future of the global payment systems?
Traditionally, money is organised in a hierarchical nature, where banks have accounts at other banks and those banks have accounts at other banks, and they are organised hierarchically around the world. For example, transactions between governments are done by central banks and almost every central bank has an account at the Federal Reserve System. So, for public money, the Federal Reserve Bank of New York is at the very top. Private money has large mega banks at the top: JP Morgan, HSBC, Santander, Citibank, and others.
In the original design of the hierarchy of money, government institutions, such as the Fed or the IMF or the ECB, were always on top. Nowadays, we see strange trends. For example, the Bank of France recently did an experiment with the Monetary Authority of Singapore and instead of them being at the top of the hierarchy of their transaction, they settled with JPM Coin, with a liability issued by JP Morgan. So they are deliberately placing themselves under the hierarchy of JP Morgan.
The higher you are in the hierarchy of money, the more geopolitical and hegemonic power you have, as it also gives you the financial power to create money and ensure that people are transacting in your notes, liabilities, securities or tokens… JP Morgan's presence at the top tells us quite a bit about the geopolitical balance of powers in today's world.
In last year's presidential elections, you opposed the so-called 'central bank privatisation law', a reform that could leave the government without real tools to alleviate the debts of the national economy (mostly those of local households and businesses). This law was pushed a year after Ecuador reached a $6.5 billion deal with the IMF in exchange for pro-marketisation reforms. Could you provide some context for this effort to undo – or so it seems from the outside – the efforts to democratise the central bank that you were involved with during the Correa administration?
I will explain this in terms of the hierarchy of money. So in any mildly sovereign economy, you have a central bank at the top; below, you have private banks, and then you have smaller institutions, which may be regional, rural or sectoral. And below them, you have clients, citizens, people, or companies that have accounts in those institutions. So each of them, the small bank or the big bank has an account at the central bank, which also has accounts in international banks.
Now, what does this law do? It said that the money of the Ecuadorian government – e.g., social security funds or the accounts of state owned companies – held at the Central Bank were to enjoy inferior status to the accounts of private banks held at the same Central Bank. This meant, also, that the money that the central bank had abroad should be destined for private banks' usage. Essentially, the law privatised the international reserves system of Ecuador, which was state owned.
The law forced the government to sacrifice all of its oil export earnings, the hard foreign currency that was coming in, in order to subsidise the capital flight of the private sector. This has important consequences. In terms of the whole economy, the only way to sustain this permanent subsidy of the private capital flight is to continue assuming debt. And this is why the IMF loan comes associated with this policy of privatisation of the central bank: the IMF funds would be used to pay for the capital flight of the private elites.
A more heterodox, alternative, or democratic Central Bank, like the one we had before this law, would try to preserve the liquidity within the domestic economy and recycle it for the benefit of the Ecuadorian people.
EL SALVADOR’S BITCOIN EXPERIMENT
Do you think that those countries in the Global South that want to avoid the prescriptions of the Washington consensus can genuinely afford not to experiment with CDBCs?
CBDCs are a necessary tool for any developing country that wants to establish some control over its economy. The debate about the technological features of CBDCs, while important, is not the main issue; you can make CBDCs relatively anonymous, with zero-knowledge proofs and other techniques.
What matters much more is the governance of the entity that will be running CBDCs– i.e., central banks. Is the central bank just an institution run by private bankers? Well, then let me tell you what's going to happen: it's going to be a platform linked to accounts from large private banks, as they are the ones with the technological ability to run such a thing. But CBDCs that aspire to a more heterodox and alternative approach, then you need something similar to what we did in Ecuador.
What do you make of the embrace of Bitcoin in El Salvador?
Bitcoin is just a superficial layer to avoid discussing what is really going on there, a kind of marketing trick. The real beauty is inside the system: Chivo, which is not just a libertarian project, but a universal, state-issued wallet for every citizen. It allows transactions that are not only in Bitcoin, but also in US dollars, i.e., it facilitates a system of commercial exchange within the national economy. Chivo is trying to do the same thing that we did in 2009, bypassing the US dollar for domestic payments and replacing it with domestic electronic means of payment.
I am sure many other countries will follow in its wake because the pandemic has forced many countries and governments to distribute free money to individuals, like pay cheques in the US case. On the other hand, as the discussion on Universal Basic Income gains ground, much will depend on how the government interacts financially and monetarily with its citizens to deliver subsidies. That will inevitably lead it down the path of CBDCs. And if there is any decency in countries like Spain, Mexico, or Brazil, the public option should be raised.
It's refreshing to hear you focus on the Chivo wallet rather than Bitcoin as such in the El Salvadorian system. Many on the left completely ignore the wallet and just focus on bashing Bitcoin...
Nayib Bukele is not my favourite character. But I do see the merits of the wallet design and some of the launch and the deployment as well. Even if there may still be faults, I understand what he's going through. Basically, he's experiencing a shortage of foreign exchange and he has to get creative, otherwise he can't get the machine to continue running. Obviously, the alternative would be to kneel down and beg the IMF for a loan, but when is that progressive?
So I think there is merit in trying to do this experimentation: I see a state-led initiative that is an alternative to the American one. The Bukele government has created a subsidy of 30 dollars to incentivise people to start using the Chivo wallet; they eliminated bank fees and fines, put out these cash machines and ATMs all over the country. This has definitely opened the path to innovation in progressive countries, who could complement these experiments with open APIs where people can develop other types of initiatives around this interface.
DEMOCRATISING CENTRAL BANKS
Let’s get back to what you said about democratising central banking. There was an explicit effort to problematise central bank operations because your leftist government in Ecuador inherited the neoliberal idea of the central bank as a fully independent and neutral institution. However, for your government, central banking was anything but neutral. So, you wanted to somehow make it open for discussion and have the people deliberate about its role?
Absolutely, we were perfectly aware that the independence and autonomy of the Central Banks was a neoliberal construct, which basically made it an elite institution at the service of financial capital, and specifically transnational financial capital, with all the inequity consequences associated with it. We had come out of the financial crisis of 1999, where basically a third of the banking system went under; it was broken and bankers ran away with people's money and put it in offshore accounts in Miami and elsewhere.
Thus, the central bank was not the most beloved institution. Rather the contrary, it was seen as an accomplice of the corrupt bankers. So we did our best to reduce central bank independence and make it a central part of the executive branch, turning it into an accountable and democratic institution.
But we also wanted to make it into a force for democratisation of the financial system. So together with the mobile money initiative, the electronic money initiative democratised the national payment system. When I first came to work in the central bank, banks had access to this payment system. And we opened it up and retrofitted it so that around 400 cooperatives, credit unions, and small rural institutions could directly have an account at the central bank. Our bet was that in the long term, the central bank would become a force for regulating capital and instituting a new set of institutions around public money: in other words, an alternative socialist economy that would promote the vision of Buen Vivir (or good living) which is inscribed in our constitution.
Your remarks offer an interesting contrast to how a lot of the crypto enthusiasts think about central banking. It seems that they identified some of the problems of the neoliberal model. So they understand that it has plenty of negative effects. But instead of subjecting it to some kind of democratic contestation and deliberation by citizens, they have this technocratic view. It says, roughly: 'now that we have a critique of central banking, we will replace it with the power of crypto!' There’s surely some deliberation about the design of the protocol but it’s a far cry from the political contestation of finance that you were outlining…
I am sympathetic to the criticism of central banking in general because around the world central banks have been designed as institutions of neoliberalism and the gatekeepers of the privileges of financial capital and private bankers. And I am sympathetic to a technological or technical alternative constructed to avoid and bypass it completely.
Nonetheless, what we all know is that at the end of the day the fiat system will still be there. Even the speculative dimension of the cryptosphere is anchored to the fiat system, for example, when you're exchanging the cryptocurrencies for dollars, euros, or another local currency of your choice, you have to interact with the sort of conventional banking and central banking system.
In the 21st century, central banks, as a public institution, should be subject to ongoing discussions about accountability, transparency, their institutional design, whether they respond to private interests, who are the people working there, whether the choices they are making benefit most of the population and so on… So, to ignore it completely is a very bad call. We do need to build a broad alliance of popular alternative grassroots movements related to money and finance, with technological alternatives, but we cannot ignore the radical importance that central banks have in any economy.
So, the vision that should come from this grassroots movement should also be an alternative vision for central banking?
You have to get into the centre of the system and fight there as well. Just recently I was in a seminar, invited by Chile’s Constituent Assembly, to discuss what they should do with the central bank. And it's a very taboo discussion, it was almost a secret meeting that we had, because the people are scared to talk about changes to the central bank, as if it were some institution in the shadows that nobody can discuss.
It's managed only by the elites, sure, but not much more than that. Instead, we hear that if you touch anything, you can trigger a collapse of society and civilization in general. Why stick with the mainstream narrative that it's only for the experts, that its parameters and standards have to be built just in Basel or Washington?
I do think that you can have democratisation in the central bank without affecting macroeconomic stability or the value of the currency. And doing so increases the opportunities of ordinary people to make a decent living.