In the United States, most people look at cryptocurrencies as an oddity, a potential investment, or an opportunity to speculate. But increasingly, cryptocurrencies are being used as they were always intended: as a system of exchange. This is on full display in Venezuela.
The challenges Venezuela has undergone in recent years with hyperinflation are common knowledge. Now, an increasing number of Venezuelan citizens have started abandoning the state currency (bolivar) in favor of cryptocurrencies like Bitcoin. The irony of this, of course, is that cryptocurrencies, as yet, are anything but stable.
Today, however, even the Venezuelan government is dipping its toes into the crypto waters, which raises the question: can the cryptocurrency revolution save a socialist nation like Venezuela?
After one of the country’s worst hyperinflation periods since WWII, Venezuelan currency has been rendered virtually worthless. According to Bloomberg data, by March of 2019, a cup of coffee cost 2,800 bolivars, or the equivalent of 28 cents, a 373,233% increase from the price of 0.75 bolivars for the same cup of coffee 12 months before.
What’s worse, that followed a 100,000:1 devaluation of the bolivar from back in 2018. By July of 2020, Venezuela’s annual inflation rate declined to still staggering 2,358.5%.
Essential goods like medicine and toilet paper have grown prohibitively expensive in Venezuela, and still, as recently as April 24, 2020, the government imposed even more price controls on food products. Meanwhile, crime has steadily continued to rise, and thanks to COVID-19, a gasoline shortage now exacerbates the crisis.
The condition for the average Venezuelan citizen has grown so untenable that over three million of them have already fled the country. And even the ones that have stayed have been fleeing the country’s currency — flocking to a newer, albeit a volatile, one.
For lack of a better alternative, Venezuelan citizens have been switching from the bolivar to digital assets like Bitcoin, Dash, Litecoin, and others. For comparison, however, Bitcoin has also fluctuated considerably in value in recent years. But it is nothing in comparison to the bolivar — falling from almost £15,000 in 2017 to under £3,000 in 2019 to over £10,000 in late 2020.
The Venezuelan government’s decision to curtail circulation of the bolivar and allow US dollar transactions over the last two years has only fueled this move by making it increasingly difficult for Venezuelans to even obtain domestic currency.
There is one big benefit many Venezuelans appreciate about using digital assets rather than standard currency. It allows them to send money to family members elsewhere without the expensive transfer fees normally associated with the process. They are also increasingly converting their rapidly devaluing bolivars into Bitcoin simply to retain and conserve some of its remaining value.
As many Venezuelans work as freelancers, an increasing number are receiving payments from clients in Bitcoin since they don’t have accounts through which they can transfer US dollars, the otherwise more viable option. The global appeal of Bitcoin works in the other direction as well. Venezuelans are feeling more empowered to engage in global commerce now that they own a more globally-recognized and valued currency.
By the end of 2019, Venezuelan citizens were already trading Bitcoin on a peer-based platform in numbers comparable to those in the US.
To try and bring its citizens back to a central currency, the Venezuelan government created its own digital asset: the Petro. The name comes from the fact that it is backed by oil (supposedly, at least). Critics of the Petro say it’s a government smokescreen for the global media and that nobody is actually using it in everyday commerce.
There is some irony in this move. One of the goals of cryptocurrencies was to democratize real economies and thwart government and bank control. Blockchain technology, a digital ledger that permanently records all cryptocurrency transactions, prevents such intervention and manipulation by design.
There’s another reason why the Venezuelan government is attempting to adopt a digital asset as the new national currency. It wants to avoid US sanctions. On September 29, 2020, Venezuelan President Nicolas Maduro announced the country’s intentions to start using digital assets in both domestic and international trade in order to neutralize the crippling effects of US sanctions.
The Venezuelan government is also taking actions to prevent its citizens from exporting too much of the country’s economy through global commerce using digital assets. It is specifically initiating a remittance service to cap the amount of digital assets that someone there can receive. It has also imposed commissions to earn a profit from the transactions.
The arguments against the rise of cryptocurrencies in Venezuela are as vociferous as those decrying the collapse of the bolivar. Naysayers of Bitcoin, the Petro, and all the other digital assets protest that:
Nevertheless, an increasing number of Venezuelan towns are installing cryptocurrency ATM machines. Not only are these innovations proving to be popular with the townsfolk themselves. They are popular with travelers as well.
The evidence of Venezuela makes clear that what was once the domain of speculators, traders, and investors has now finally made its way into the consumer marketplace as well.
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