Written By: Pedro Santiago – Forex Focus
Say what you will about Venezuelan President Nicolás Maduro, but the man seemingly won’t go down without a fight. He recently announced plans for the country to develop its very own cryptocurrency—dubbed the “petro”—to circumvent the economic sanctions placed on the country by the United States. The new crypto, states Maduro, will be backed by reserves in several natural resources, including oil, diamonds, gas and gold.
The Venezuelan government has hopes that the new currency will rejuvenate the country’s ailing economy, which is on track to hit 4,000 percent inflation before year’s end. Moreover, its hope is that the petro will return monetary sovereignty to Venezuela by creating a new avenue for financial transactions that will, in Maduro’s words, “overcome the financial blockade”.
While analysts and international observers have been—understandably—quick to scoff at Maduro’s latest attempt to restore growth to his economically battered country, this effort could show promise if done properly. Cryptocurrencies have been on a bullish run this year. Bitcoin—one of the earliest cryptocurrencies—is valued around US$16,000-17,000 per bitcoin. The massive growth has prompted speculations that the cryptocurrency is a bubble waiting to burst. But, however unstable they may be, it shows that cryptocurrencies have enormous potential for wealth creation through unconventional means—quickly drawing the attention of the embattled Venezuelan regime.
Few details exist for the petro. Maduro has not outlined to what currency the petro will be pegged, how it will be developed, whether it will be freely traded, or how it will be exchanged for these reserves. Not a good sign. There have been plenty of cryptocurrencies over the years, and they have all exhibited potential for storing value, operating as a unit of account and proving a reliable medium of exchange. Droves of cryptocurrencies have failed miserably despite having these positive attributes, and there is no indication that the petro will fare any differently, even if it is able to comply with these requirements.
Venezuela could find success with the right scheme attached to the petro. Rather than simply tying the petro to the value of its natural resources, Venezuela could devise a scheme wherein the cryptocurrency is convertible into real commodities. The cryptocurrencies could be swapped for certain amounts of the resources the country is using to back the petro. Whether these baskets were for individual commodities or bundles of them, they would be traded for real goods—rather than bolivars or US dollars—and allow the country a different way to operate on the world market. While this approach may seem unconventional, Venezuela has proven both willing and capable of using its physical commodities in lieu of fiat currency. Additionally, the scheme would operate in a space heretofore unregulated or considered by most countries.
However, this is one of the earliest cases of a cryptocurrency backed by a national government. The move is a stark departure from general sentiments in the US, where talk of regulation could see cryptocurrencies drawdown, if not crash entirely. Digital currencies have historically been used for illegal activity thanks to their reliable and anonymous public ledger of accounts. Despite the clandestine nature of some of their uses, cryptocurrencies have seen ballooning values, thanks to the underlying blockchain technology that drives their production. “Mined” on independent computers the world over, the blockchain allows cryptocurrencies to be produced independently from financial institutions or government intervention. The freewheeling nature of cryptocurrency valuation appears to be what has inspired Maduro to seek out this solution to his country’s growing economic woes.
Venezuela has been in economic crisis for a few years now. The recent US sanctions have only added fuel to the fire sparked by widespread protests, shortages and inflation. Making matters worse is the government’s management of the crisis; over the past year, it has persisted in upholding its debt payments, but has now hit a brick wall as its foreign reserves have dwindled to US$9 billion. With more than $65 billion in debt to bondholders, the country is largely expected to default on many of its obligations. Making matters worse are its worsening relations with its major trading partners. A steady drop in the quality of the oil Venezuela exports, as well as default on payments to various refineries, have whittled away at whatever confidence was left in the Venezuelan government.
With the Venezuelan bolivar’s value dropping from 3,100 to buy one US dollar to 103,000, Maduro is frantically seeking out solutions to the problem. His attempts have included:
Replacing the 100-bolivar note with a 500-bolivar note. The plan resulted in protests and looting—causing the government to shelve the plan until a more appropriate time was determined.
In 2015, Maduro’s government created a new exchange rate to combat the skyrocketing inflation. The new exchange rate was quickly abandoned, and the other exchange rates are largely ignored due to their overvaluations. At present, unofficial exchange rates appear to be the most accurate measures.
- Plan Rabbit. A plan in which Maduro encouraged Venezuelans to eat more rabbit. His scheme would have seen rabbits given to Venezuelan homes for food. However, the plan never materialized.
This latest attempt at alleviating the crisis could see the same end as these previous schemes. However, the petro seems more feasible than these other plans if carried out thoughtfully, and with the right backers. While thoughtful is a term seldom used to describe Nicolás Maduro’s government, the nature of cryptocurrencies lends itself to his current situation.
There are various factors working in Venezuela’s favor if you look closely enough. Yes, the US has put the squeeze on the government with its latest round of sanctions. Additionally, the government has proven less than proficient with its public management. However, where Venezuela lacks in skills and money, it compensates with allies and natural resources.
Firstly, Venezuela possesses one of the largest proven oil reserves on the planet. A recovery scheme centered on its vast supply of oil is only natural. Second, Venezuela’s staunch opposition to the US government has garnered it a series of allies in the same vein. The Bolivarian Alliance—Venezuela’s proto-regional trade bloc—includes Bolivia, Ecuador, Cuba and Nicaragua, among various other member states. Many of these members have been beneficiaries of Venezuela’s Petrocaribe initiative, which provides hydrocarbon resources to Caribbean countries that do not possess their own resources. This has garnered the country swathes of success in influencing regional policy and sentiments. While Maduro lacks the fiery rhetoric of his predecessor, Hugo Chavez, he has inherited many of his successes, and this is one of the most important. Lastly, souring relations with the US has seen Venezuela and Russia draw ever closer as they seek to operate beyond the US’ sphere of influence. With both suffering deep economic consequences from US sanctions—and both prominently involved in OPEC (Organization of the Petroleum Exporting Countries) decisions—the two countries share overlapping policy areas for cooperation.
Ultimately, the ingredients of success are there. Venezuela just needs a better chef than Maduro to put the dish together.