Venezuela today is one of the main cryptocurrency centers in Latin America. Formerly one of the richest countries on the continent, it is especially knowns for exporting oil. Venezuela earned the nickname “Saudi Venezuela” between the fifties and the eighties. Today its political, economic, and social context are rather delicate.
Let us look at some data that may expand on the crisis experienced in the country. According to estimates from the Central Bank of Venezuela, the inflation rate between 2016 and 2019 was 53,798,500%, the highest ever in the history of the world. It is estimated that currently about 90% of Venezuelans live below the poverty line and that more than 4.5 million citizens have left the country.
With a landscape as turbulent as this, crypto assets are becoming increasingly more important for the local economy, to the point that Nicolás Maduro’s government created the first official national cryptocurrency: the Petro. How is it possible? That is what the Cripto InterCambio blog will explain to you now.
The hyperinflation problem
The surreal hyperinflationary process caused the Sovereign Bolivar (VES), which is the official currency of the country, to lose drastically its value. With a local minimum wage of 300,000 bolivars a month, which is approximately $ 10, Venezuelans can buy just over a kilo of cheese, according to the BBC.
In a situation like this, storing physical money means losses to its bearer. Suppose you have 50,000 bolivars in your wallet; without monetary correction, with every passing day it will be worth a little less. If yesterday it was possible to buy half a dozen eggs, for example, tomorrow it will only be possible to buy four.
As a result, the population began not to believe in the money issued by the central bank and started looking for more stable currencies. During the second half of the twentieth century, it was common in countries (Argentina, Brazil, Mexico and Peru) with hyperinflationary processes to take refuge in the US dollar, whose stability was much greater than that of their local currencies.
With the advent of cryptocurrencies, the population has won a new alternative way to escape the inflation of their national fiat currency. Many Venezuelan citizens have begun to invest in crypto assets such as Bitcoin to avoid the losses that come with the devaluation of their traditional money. According to the Coin Dance website, which analyzes the volume of bitcoin transactions in each country, in just one week in 2019 about 138 billion bolivars were converted to the popular cryptocurrency.
Cryptocurrencies as an alternative to hyperinflation
In a turbulent political scenario like the one in Venezuela, cryptocurrencies have many advantages over traditional money, serving as an alternative to hyperinflation to a part of the population.
People invest in foreign currencies to avoid the inflationary devaluation of local money. Reality, however, often complicates things. To own dollars or to make transactions with them, it is likely that an individual will be required to have some type of account in a traditional financial institution, such as a bank. Additionally, the problem is not only that exchanging money is subject to taxes (which tend to be increased to avoid local currency being converted to a foreign one), but also that owning foreign currency is dangerous due to confiscation and other arbitrariness that could be committed by the local government.
Cryptocurrencies can escape this kind of arbitrariness. Since the transactions are carried out anonymously, the government simply cannot exercise any type of control over them. Do you want to leave the country and take your property with you? You just have to have your virtual wallet with you. Do you need local money again? It is possible to exchange it on an exchange platform or directly with another citizen.
Petro: the official cryptocurrency of the Venezuelan government
Aware of these facts, the government of Nicolás Maduro tried to take advantage of the cryptocurrency boom. They developed their own token, called Petro. With the motto “towards the digital economic revolution”, the idea is to create a stable currency based on the main commodities of Venezuela: oil, gold, iron, and diamonds.
Armed with a virtual wallet of the project, Venezuelan citizens can exchange their bolivars for Petro, make purchases, provide services, etc. Ideally, being backed by commodities should help the coin avoid the huge fluctuations that devalue bolivars. Over time, Petro could become an alternative to Bitcoin and other altcoins, which would keep the population’s capital in the local economy.
In addition, the launch of cryptocurrency is also part of a complicated geopolitical context. Since 2017, the Trump administration has imposed harsh economic sanctions on the country. It prohibited companies and US citizens from buying oil and negotiating Venezuelan public debt securities.
The entry of dollars into the country has fallen dramatically and Petro is an attempt to remedy this situation. Since they are marketed through blockchain technology, with Petro it would be possible to receive dollars from abroad without the need for intermediary financial entities linked to the United States.
However, the actual situation with cryptocurrency in the country is quite controversial. When Nicolás Maduro launched the crypto assets in 2018, he said it would be backed by 5,000 million barrels of oil. However, recently, a much lower value has been reported: 30 million barrels.
Despite the order that local banks must accept transactions with Petro, currently only a few local businesses or services use the cryptocurrency. At the international level, the situation is similar: none of the main market exchanges have the cryptocurrency listed – not only because of distrust, but also because the US government has banned its citizens and businesses from buying the crypto assets.
Conclusion: Venezuela, a cryptocurrency laboratory
As we have seen, cryptocurrencies have demonstrated their importance in a hyperinflationary and severe economic crisis context. They are not only a way of storing value and a means of exchange, but also a way for local citizens to safeguard their assets in a secure and anonymous way against possible abuses by local authorities.
However, the difficulties with the implementation of Petro are symptomatic. The first cryptocurrency launched by a government has had great difficulties, either because of the distrust of citizens and international investors, or because of the complex geopolitical context it exists in.
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