Cryptocurrency to alleviate countries in crisis? The example of Venezuela

Venezuela is still dealing with a political, economic and humanitarian crisis. The problems are among other things caused by historical over-valuation of the currency and the so-called Dutch disease of a mono-commodity economy. Apart from oil, practically everything is cheaper to import than to produce in Venezuela (Lander, 2014). This has generated serious consequences and distortions, which continue today.

One of the most damaging consequences is the 95.8% devaluation of the Bolívar, the national currency (Efecto Cocuyo, 2018).  In 2018 the government launched its own cryptocurrency ‘El Petro’, backed by oil, to provide a solution to the economic crisis. According to the president, Nicolas Maduro, the Venezuelan cryptocurrency’s meaning for the country was a way to become more financially independent and to resolve problems in the economy (Gozzer, 2019).

Using cryptocurrency tools opened breathtaking possibilities. Venezuela was starving for a trusted currency, and its citizens were accustomed to mining and using cryptocurrencies. Global investors were wild for anything crypto and were buying into even obvious frauds. Even though el Petro had very weak backing, royalty and tax savings on oil that possibly never would be extracted, Bitcoin and other cryptocurrencies had no backing at all. Still the market capitalization of the latter was approaching $1 trillion (Brown, 2019).

Despite the hopeful promises made by el Petro, it turned out to be a myth rather than reality.  “It does not exist” or “it was a scam” are usually the first answers that are obtained when asking about el Petro to cryptocurrency experts. The reason: el Petro is absent in all major international exchanges or exchange houses, those digital platforms such as Binance or Coinbase where users buy and sell bitcoins, ethers, litecoins or any of the more than 2,300 cryptocurrencies that exist in the market (Gozzer, 2019). On top of that, there is the problem of trust in the honesty and competence of Venezuela’s currency management. As the official currency, the Bolívar, showed; the Venezuelan government could not be trusted (Brown, 2019).

Jhonathan Higuera, an analyst at the National University of Colombia and a member of the Blockchain Foundation confirms the disappointment of el Petro. Nevertheless, he points out that Venezuelans still seem to prefer storing their money in a digital wallet, in for example the form of Bitcoins, rather than holding on to the enormously devaluated national currency: “It is interesting to see that the total volume of Bitcoins that are traded through localbitcoins in the world is on average 13,000 per week. Venezuela is responsible for an average of 1,800, which is 13% of the world volume.” (García Casas, 2019)

A major reason for citizens of countries in crisis to choose crypto currency is that it gives them access to the financial world outside of their respective country. They are not free to exchange their currency for e.g. US dollars or any other more stable currency, neither do they have access to worldwide banking services. Hence, crypto currencies allow them to bypass these barriers. Despite the future of Venezuela still being very uncertain, I am glad to see that there is at least one country in the world where crypto currencies are serving a practical value for ordinary citizens rather than speculators.

Brown, A. (2019). Venezuela’s Failed Cryptocurrency Is the Future of Money, Retrieved from: https://www.bloomberg.com/news/articles/2019-05-10/venezuela-s-failed-cryptocurrency-is-the-future-of-money

Efecto Cocuyo, (2018). BCV oficializa devaluación de 95,8% y tasa de cambio pasa a 60 bolívares soberanos. Retrieved from: https://efectococuyo.com/economia/bcv-oficializa-devaluacion-de-958-y-tasa-de-cambio-pasa-a-60-bolivares-soberanos/

García Casas, L. (2019). El petro, la moneda invisible. Retrieved from:  https://www.dw.com/es/el-petro-la-moneda-invisible/a-47304724

Gozzer, S. (2019). Crisis en Venezuela: qué fue del petro, la criptomoneda con la que el gobierno de Nicolás Maduro quería evadir las sanciones económicas. Retrieved from: https://www.bbc.com/mundo/noticias-america-latina-49045096

Lander, E. (2014). Venezuela: terminal crisis of the rentier petro-state model? Retrieved from: https://www.tni.org/files/download/venezuela_terminal_crisis_of_the_rentier_petro-state_model._with_very_minor_chaanges_0.pdf