Venezuela has struggled in the post-Chavez era. The country has been in a rapid decline, a free-fall from being the wealthiest economy in South America to teetering on the edge of financial and social ruin.
Over the last five years alone, Venezuelan currency, the bolivar, has lost 99.8% of its value. On December 7, Patricia Laya, the Bureau Chief of Venezuelan Bloomberg, tweeted that she had “spent around 20 minutes in line at the ATM this morning to get a maximum of 5,000 Bolivars. That’s around $0.05.” Such levels of inflation have made it nearly impossible to purchase any goods or services in Venezuela, bringing the national economy to a grinding halt. The BBC has reported that this economic crisis has led to rising levels of starvation, with a recent survey finding that 95% of citizens say they are not earning enough to adequately feed their families.
The Venezuelan economy is also still reeling from the crash in oil prices in 2014. Venezuela has the world’s largest oil reserves and its economy is disproportionately structured around the commodity, with oil exports accounting for 95% of all of Venezuela’s export revenue. With oil becoming the dominant economic force in the country, agricultural development has stagnated and the nation has become dependent on imports to provide basic food and goods. With inflation now at an all time high, importing food has become problematic. A black market has emerged that has given rise to a rampant new industry – food trafficking.
To summarize, Venezuela is facing a host of issues. Its economy is in dire straits, basic goods are no longer affordable, inflation continues to grow, and businesses have started to shut down. In turn, Venezuela now has to deal with significant social issues. Starvation, black markets, and street violence are all rising problems.
So how and why could the introduction of a crypto-currency help resolve this situation? Venezuela is considering a dramatic economic shake-up that would see a crypto-currency replace the fiat currency system as the nation’s main financial system. Crypto-currencies like bitcoin are decentralized and work using a peer-to-peer currency system. With the collapse of the bolivar against the dollar, excessive money-printing has led to a 57% depreciation last month alone. Bitcoins therefore offer a safer way to hold onto wealth.
The sheer volume of bitcoins being traded in Venezuela indicates the popularity of the crypto-currency. In a country where the monthly minimum wage trades for under $2 (USD) on the black market, over $2.1 million USD worth of bitcoins were traded in the first week of December alone.
Such popularity led to a shock announcement last Sunday as President Maduro announced the launch of the “Petro.” The Petro is a crypto-currency that is aimed to resolve the economic crisis. It is backed by oil, gas, gold, and diamonds. President Maduro stated that this new currency would help Venezuela “advance in issues of monetary sovereignty, financial transactions, and overcome the financial blockade.”
Critics have said that a change of currency will be irrelevant if the economy is managed in the same irresponsible fashion. Richard Lapper, a Latin America focused journalist, is wary that Venezuela’s “terrible track record in economic policy… and particularly in monetary policy… will re-emerge.”
Crypto-currencies as we know them are not issued or regulated by any central authority. Any crypto-currency state backed by President Maduro would therefore be an entirely new entity. In this sense, the Petro would potentially be better described as a digital currency, a currency directly issued by the nation’s central bank.
In this case, the government would be able to oversee all the transactions happening in the country. While this could conceivably give rise to a “big brother” state, so too could it be used to clamp down on money laundering, tax avoidance, and in a wider sense to monitor and control the illicit drug trade. Some have hailed such a venture as a positive. Sean Walsh of the bitcoin-focused investment firm, RedWood City, said, “If any government is willing to set up a fair set of rules for a crypto-currency, it would be a great thing.”
The idea has also been met with derision by the political opposition in Venezuela. Angel Alvarado, an opposition lawmaker and economist, dismissed the idea as “Maduro being a clown.” He went on to say “this has no credibility.”
At this early stage, it remains to be seen whether a new currency can be used to restore peace and stability to the nation. In theory, the idea of a digital currency certainly does appear to have the potential to transform Venezuela’s social and economic landscape.
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