A developing plan in Mexico to create a digital peso could demonstrate the potential of bitcoin technology to the rest of the world, if it’s successful.

After all, digitizing the currency would be just one part of a greater endeavor to adopt block chain technology into what the project’s leader hopes might become a more transparent and trustful bureaucracy and democracy.

The plans could have many far-reaching implications for the country’s economic and political problems; namely, the remittances market, the tax process and the country’s unbanked population.

“I’m sure there will be a day where many countries will have their own block chain,” Luis Daniel Beltrán, Peso Digital head and chief executive of Microbit, told CoinDesk. “It’s the natural evolution of trusted systems.”

Beltrán said he met with members of the Bank of México (BdM) in March to talk about the technology’s potential and how they can implement it into existing government operations. José Rodriguez, partner in Mexican and Argentinan Exchange Unisend and chief executive of ALTIS: Altcoins Investment Services, was also at the meeting and is largely involved in the project.

A second meeting was held on 4th July; another is set for early September.

Lorenza Martínez Trigueros, BdM managing director of corporate payment systems and services, denied that it would take on the project in an interview with 24 Horas. However, she indicated that the proposal had been considered:

“[We analyze how] technology can be used for other purposes such as voting or other kinds of civic involvement, as you mentioned. We are analyzing, but definitely not from the point of view of independent assets, but rather to take advantage of this technology in national currency, as the ‘peso’, and it is where it becomes a subject of analysis and research rather than a specific project.”

CoinDesk began seeking comment from Bank of Mexico in April, but has not received comment on the meetings.

Block chain integration

Peso Digital would be the digital version of the country’s fiat currency, using block chain technology. Instead of one block chain, three would back the digital peso, each to fulfill a different need. It would be controlled by the Mexican central bank – making block chain technology legal technology – to strengthen the country’s democracy and transparency.

Beltrán said:

“We have the opportunity to replace the trusted entities with logical and mathematical algorithms.”

The first block chain would be modeled off of bitcoin’s, allowing anonymous, transparent and irreversible transactions of the peso between two people without any intermediaries.

The second would be integrated with the BdM’s Interbanking Electronic Payment System (SPEI) – an open protocol “large-value funds transfer system in which participants can make transfers among themselves on behalf of themselves or their customers – for a monthly service fee. Beltrán said that applying the block chain to SPEI could be the project’s most complex element.

Each digital wallet, he suggested, could be linked to users’ bank accounts or SPEI addresses. This would give the advantage of cash distribution and round-the-clock transaction availability. The level of implementation of this block chain is, perhaps, the most complex element.

The third could automate the tax process by fully integrating with the second as well as the private key and the FIEL (Firma Electrónica Avanzada), a secure and encrypted digital electronic signature.

Beltrán said:

“If the government adopts this technology and gives it a legal value they will be creating an incredible platform of efficiency and a granular democracy … we may get to a point where we no longer vote for people – we will vote for projects.”

Tax transparency

The main goal of the Peso Digital project is to implement the block chain as a resource of trust for Mexicans.

Beltrán said:

“Banco de México is already checked. We are now planning to go further with other institutions like SAT – IRS in the US – and other institutions in order to complete all our goals. […] If the digital peso succeeds and and it’s well implemented we could have an incredible transparency tool for management of resources.”

Figures from 2011 data show that of the OECD’s 34 member countries, Mexico has the lowest total tax revenue – 19.7% of GDP, compared to the US’ 24% and the UK’s 35.7%.

And in a report titled “Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy”, its authors at non-profit research and advocacy group Global Financial Integrity found that the country lost $872bn in financial flows between 1970 and 2010.

Pablo Gonzalez, CEO of Mexico-based bitcoin exchange Bitso, said that Mexican authorities have pushed to reduce cash use and increase bank transactions over the last decade, for two reasons: “as an anti-money laundering precaution and to reduce tax evasion”.

He added:

“A more robust and effective back-end infrastructure for the national currency would substantially reduce the tax evasion. Not only that, it would reduce the high costs for detecting tax evasion.”

Government corruption

Mexico is recognized domestically and abroad for its rampant government corruption. It rates 106 out of 177 countries and territories in Transparency International’s 2013 Corruption Perceptions Index.

Government corruption has a significant impact on the structure of government expenditures, the GFI report indicated. For example: large telecommunications companies like Telmex – who controls 80% of the landline market and whose parent company América Móvil 70% of the mobile market – are likely to offer public officials better kickback opportunities than smaller, more competitive firms with lower profit margins.

The opacity regarding this kind of beneficial ownership in Mexico is what allows multinational and domestic corporations, their subsidiaries and high net worth individuals “to transfer profits abroad in order to reduce tax liability or to circumvent local tax and exchange regulations (or capital controls) in developing countries,” the GFI report said.

Gonzalez said:

“Transparency is one of the best weapons for battling corruption. The digital peso can offer full transparency in how exactly the money is being spent by the government at a low cost. Furthermore, accounting is the first step in transparency to battle corruption.”

He added that the digital peso “system” could be used for elections, passing bills through congress and other democratic purposes.

Banking and remittances

Gonzalez emphasized that with the digital peso system anyone can have access to the currency because the technology is open source.

“It would be one step closer to a truly global economy, in which you can enable people to do their own FX trading and you don’t have to have $7m in the bank to do that – the person sending two dollars will get the same rate as the person sending a million dollars.”

Bitcoin’s potential in the remittances market has been one of the more compelling cases for digital currency.

Last year, Mexico was the fourth largest receiver of remittances in the world, a Pew Research study showed. However, a World Bank report said that 57% of all municipalities in the country lack access to any bank or microfinance instituion.

Further, 98% of remittances to Mexico come from the US, but Quartz reported earlier this month that many US banks are getting out of that business, citing Bank of America as saying that it retired its cheap money transfer service to Mexico for reasons of “limited demand”, and another World Bank report that presents banks’ reporting discrepancies.

Gonzalez said:

“The word ‘remittance’ is going to fade away in some years because you wont have to go through a special process to send money […] That’s the idea: you’re just transacting with somebody.”

Digital currency in Mexico

This March, the BdM issued its first statement on digital currency use via its website, in which it restricted the use of digital currencies, including bitcoin, by financial institutions regulated in Mexico, translations suggest.

Like central bank advisories issued in other countries the restrictions seemed to be more cautionary than discouraging. The BdM has remained open to bitcoin dialogue.

In the month following the warning, Mexico became the site of the Bitcoin Foundation’s third international chapter, Fundación Satoshi Nakamoto. The founders created the group to learn more about the bitcoin technology, and have since identified the main players in the bitcoin ecosystem that will help move their organisation forward.

The group has already created a broader understanding of the digital currency’s advantages for consumers, media outlets and regulators.

“What I can tell you,” said Beltrán, “is that they [the BdM] are looking to the bitcoin phenomenon very closely (more than I imagined) and they are very interested in searching and adopting the best technology and adapting it to the country.”

Méxican peso image via Shutterstock