Cryptocurrency in Venezuela: A Distraction From A Ravaged Economy
BY IRENE EZRAN
Venezuelan President Nicolas Maduro recently issued the Petro, a national oil-backed cryptocurrency, to circumvent U.S. sanctions and provide an alternative to its collapsing bolívar currency. Last week, one of the legislative bodies in Venezuela’s National Assembly declared the Petro an illegal asset because it considers the currency a form of unregulated debt.
Given that Maduro has consolidated power by essentially replacing the opposition-led National Assembly with a new Constituent Assembly comprised of his loyal supporters, the legislature's decision will not have a substantial impact. However, despite Maduro's claims that the Petro will stabilize Venezuela's hyperinflation and solve the country's ills, due to the country's collapsing oil production and the lack of credibility in Maduro's government, it is unlikely that this currency will improve Venezuela's economy.
Recently, Venezuela has been in the international spotlight due to its large-scale economic crisis. There have been massive food and medical shortages, inflation has risen to over 4,000 percent, the unemployment rate has increased to 17 percent, and the rising crime rate in Caracas (the nation's capital) has made it one of the world's most dangerous cities. This crisis is in stark contrast to Venezuela's prior position on the global stage. Venezuela has the world’s largest oil reserves, and, in 2001, it had the richest economy in Latin America.
Much of the current economic crisis can be attributed to former President Hugo Chávez, Venezuela’s populist, socialist leader. Chávez nationalized industries and relied almost entirely on the country’s oil income to support his massive spending on social welfare programs. While the country flourished when oil prices were high, this was an unstable source of income that was bound to collapse during an oil crisis. Indeed, shortly after Nicolas Maduro became president in 2013, global oil prices dropped. President Maduro's failure to address Venezuela’s dangerous dependence on oil exports initiated the worst economic crisis in Venezuelan history.
In 2014, the United States imposed sanctions on Venezuelan officials in response to their brutal human rights abuses when they cracked down on citizens who protested against Venezuela’s plunging economy. Additionally, in 2017, President Trump signed an executive order placing sanctions that prevent U.S. businesses from buying bonds or stocks from the Venezuelan government or its state oil company, Petróleos de Venezuela, S.A. (PDVSA). The Petro circumvents these sanctions because cryptocurrencies are neither issued by a central authority nor regulated by any organization that could halt foreign investments in Venezuela.
Yet, the interest in cryptocurrency in Venezuela did not begin with Maduro’s government. Many Venezuelans who distrusted their government’s economic policies invested in bitcoin (the first cryptocurrency) as a store of value. In addition, with the lowest minimum wage in all of Latin America and the soaring costs of basic necessities, many Venezuelans turned to bitcoin mining as a principal source of income.
Bitcoins are exchanged on a decentralized peer-to-peer network and transactions are recorded on a global ledger called a blockchain. Mining computers solve mathematical puzzles, add the solutions to the ledger, and the miners receive 12.5 bitcoins as a reward. Since the value of the bitcoin has skyrocketed in recent years, many Venezuelans became bitcoin miners to receive a source of income. Although mining bitcoin requires immense processing power, electricity is highly subsidized under Maduro’s government, so there is virtually no cost for Venezuelans. In essence, the miners are “using free electricity to generate cash,” according to The Atlantic.
Although Venezuela has no cryptocurrency laws, in October of 2017, police arrested miners on various charges such as "illicit enrichment" and "damage to the national electricity system.” Ironically, in December of 2017, Maduro highlighted the benefits of cryptocurrency and announced the release of the Petro. The government then claimed that the Petro’s February presale raised $735 million from 83,000 investors in 127 countries. However, despite the initial hype, there are many reasons to be skeptical of the new currency’s economic viability.
First, the Petro is supposedly backed by oil reserves, and thus the Petro will reflect the price at which the Venezuelan government values oil at when the currency is used, according to the Chicago Tribune. However, Venezuela's oil production is collapsing. Crude oil production fell by 29 percent in 2017, so this price fluctuation is not a promising guarantee of the currency’s stability. Moreover, given the corrupt and untrustworthy nature of Maduro's government, it is unlikely that the state will fulfill its obligations to distribute the oil if the buyers of the Petro seek to cash out the currency. As Randy Brito, the founder of Bitcoin Venezuela, stated, the Petro is "backed by nothing but the promise of a government that [has] already defaulted."
In addition, major glitches in the government’s development and launch of the Petro further demonstrates the unreliable nature of the currency. On the day of the Petro presale, the government released the Petro Whitepaper, which attempted to outline some of the currency’s functionalities, but lacked information on the details of its blockchain architecture. For example, the government announced that the cryptocurrency would be sold on the Ethereum platform, but it unexpectedly changed to a different platform called NEM Mosaics upon its release. Despite the last-minute switch, 100,000 Petro tokens are still available on the Ethereum blockchain, adding to the confusion. Moreover, Maduro’s claim that the Petro had raised $735 million in the first 24 hours of the presale is likely fabricated, as the Venezuelan government still appears to control the entire cryptocurrency.
Furthermore, cryptocurrencies are generally very volatile. For example, the value of bitcoin increased by 300 percent in 2017 and then plunged by over 50 percent to its current level. However, since the bolívar lost 99 percent of its value in the past three years, some may still regard the Petro as the more stable currency. On the other hand, the Petro can only be bought in U.S. dollars, Euros, and rival cryptocurrencies, which few Venezuelans have access to, and it can only be used to pay taxes in Venezuela, which is of no use to international buyers. This leads some economists to argue that the Petro should not be considered a currency at all.
Beyond the lack of credibility in the currency, investors have several reasons to be concerned about the future of the Petro. First, Maduro’s opposition considers the national cryptocurrency unconstitutional, and will likely declare the currency void if they come to power. However, this would take several years since the majority of opposition parties have been barred from running in the 2018 elections.
Additionally, buying Petros can have negative legal repercussions for American investors. The U.S. Treasury declared Petro purchases a violation of U.S. sanctions, so investors run the risk of being prosecuted. The United States is particularly cautious with Venezuela's Petro since other countries who also face U.S. sanctions such as Russia and Iran have expressed the desire to create their own national cryptocurrency. In addition to defying U.S. sanction laws, investors in the Petro should be cautious because they would be aiding a government with an atrocious human rights record.
Given the disastrous state of the Venezuelan economy and the international hype around cryptocurrency, the issuance of the Petro may initially appear to be a solution to the current economic crisis. However, when examining the falling oil production that supposedly backs the Petro, the lack of trust in Maduro’s dictatorship, and the volatile nature of cryptocurrency, it is clear that the Petro is unlikely to lift Venezuela out of its economic crisis. Instead, the Petro comes as a mere distraction from rising poverty, unemployment, and the devastating economic policies of Chávez and Maduro.