Things are not going well in Venezuela. Citizens of the once-wealthy South American country are facing chronic food and medicine shortages, child malnutrition has reached a crisis point and hundreds of people have been killed this year in a series of major anti-government protests.
One of the main drivers behind the country’s continued decline was the 2014 crash in the price of oil. Venezuela's economy is totally dependent on oil, which makes up 95 per cent of the its export revenues. As the oil price has dropped, the country has found itself unable to keep up with debts acquired through years of extremely heavy government spending. Take into account the country’s record of government corruption, failed policies and widespread economic incompetence and there’s not much of a silver lining out there for the Venezuelan people.
But Venezuelan president Nicolás Mauro thinks that a new digital currency could revive the country from economic collapse and help it sidestep US sanctions. During the latest episode of his weekly TV show Los Domingos con Maduro, the president announced his plans to launch the ‘petro’ – a digital currency somehow backed up by Venezuela’s oil, gas and diamond reserves.
“Venezuela will create a new cryptocurrency,” Maduro told his live studio audience during the five-hour broadcast, which also included Christmas songs and dancing. The petro would help Venezuela “advance in issues of monetary sovereignty, financial transactions and overcome the financial blockade,” he said. Venezuela’s existing currency, the bolívar, is rapidly dropping in value, reducing the monthly minimum wage to just over $4.30 and plunging millions of Venezuelans into poverty.
It looks like Maduro has had one eye on the rising price of bitcoin, which is already on its way to $12,000 after breaking the $10,000 barrier for the first time late in November. Somewhat ironically, some Venezuelan citizens are already well ahead of Maduro when it comes to the cryptocurrency, and started mining bitcoin as a way of earning enough US dollars to import food and medical supplies.
Venezuelan opposition leaders quickly decried Maduro’s proposal, saying it lacks credibility and has no hope of being passed by congress. They’re right, for a whole bunch of reasons. Here’s why we’re unlikely to see a state-backed cryptocurrency anytime soon and why Venezuela is the last place you’d expect it to work.
Venezuela’s problems are the result of decades of economic mismanagement, says Richard Lapper, an expert in Latin American affairs at Chatham House. “They have a terrible track record in economic policy more generally and particularly in monetary policy,” he says. While the country enjoyed relative prosperity during years of high oil prices, it squandered that money through government corruption and the pursuit of short-term policies that unravelled as soon as oil income declined.
The problem is that a new currency, digital or otherwise, doesn’t make any of those things go away. “These same problems will re-emerge if you don’t change the fundamental direction of governmental policy,” Lapper says. According to Maduro, the petro will be tied to the country’s natural resource reserves but, as Lapper points out, its existing currency, the bolívar, is already tied to those oil reserves and that hasn’t stopped it losing 57 per cent of its value in the last month alone.
Maduro didn’t include many details in Sunday’s proposal – suggesting that he might not have briefed on scheme all that much – but even if he did manage to get it through the Venezuelan congress, there’s not much evidence that it wouldn’t immediately start to fall in value just like the bolívar has done.
The Venezuelan president might not have the best grasp on the technical ins and outs of cryptocurrencies, since the kind of currency he described isn’t a cryptocurrency at all. Cryptocurrencies like bitcoin aren’t issued or regulated by any central authority such as a nation state or a bank. That’s part of what makes them so attractive to criminals – any payments made using bitcoin are processed by a huge network of computer systems, not by any one particular state or payment system. Normal currencies, like the dollar or the euro, are much more closely tied to the economy of the state (or states) that issue them.
Read more: How much energy does bitcoin mining really use? It's complicated
“With bitcoin there’s a currency without an economy,” says Leander Bindewald at the University of Cumbria. The price of a single bitcoin isn’t tied to any other currency or asset – it’s much more closely linked to supply and demand. Like any other asset, if there are enough people that want to buy it, the price will keep on going up. Although some people believe in the long-term viability of bitcoin as a currency, the reason its price is going up so much right now is because people are buying it in the hope that its price will carry on rising, says Bindewald.
Bitcoin’s current success is good news for the few investors who have already bought the cryptocurrency, but it doesn’t make it something that would immediately work as a national currency. Very few people are actually using bitcoin to buy and sell legal goods, since the price of the cryptocurrency fluctuates so much that it’s more or less impossible to use as actual money. If you’d bought a coffee using bitcoin at the beginning of this year, the café would now be selling that coffee at a tenth of its previous bitcoin price if it wanted to keep things the same in real terms.
So Maduro’s proposal has a couple of major snags. Firstly, if the currency is still tied to the Venezuelan economy then it’s probably not going to do so well unless his government puts in place some new policies to reverse its disastrous economic situation. Secondly, existing cryptocurrencies are not at all set up to act as national currency replacements.
When Maduro spoke about a cryptocurrency tied to Venezuela's national resources, he seemed to be actually describing a digital currency – a digital version of an existing currency directly issued by a nation’s central bank. At the moment in the developed world, a lot of our transactions only take place in digital terms anyway, so the idea that a central bank would start to issue digital currency isn’t anywhere near as radical as adopting a cryptocurrency.
Plenty of central banks have already publicly discussedthe idea of issuing digital currencies, although no country has taken the plunge yet. If a country did try and pull it off, it’d mean that the central government would act a bit like a high-street bank for its citizens, holding accounts on their behalf and letting them conduct transactions through its own systems. Governments would have much more oversight over all the transactions happening in a country, which would help them clamp down on money laundering and tax avoidance through cash-in-hand transactions.
This idea is being considered in countries such as India, which has problems with untraceable cash transactions and Sweden, where people aren’t that keen on using cash any way. Sweden’s central bank has already launched a project to see whether it could introduced an e-Krona to replace some of the country’s physical cash.
But what’s being talked about in places such as India and Sweden isn’t really a new currency, it’s more about moving away from physical cash towards a cashless society. Physical currency also provides citizens with anonymity, something that is harder when all money passes through the hands of digital payment processors.
In any case, a move away from cash in Venezuela wouldn’t arrest the country's decline either. Since it’d be the same old currency at heart, it wouldn’t be worth any more than it was previously and the government would have the added headache of trying to put in place a new financial system for 31 million people. And with the Venezuelan government's terrible track record on monetary policy, that would be a disaster, Lapper says. “Frankly they don’t really know what they’re doing,” he concludes.
This article was originally published by WIRED UK
