Cryptocurrency to save Venezuela?

Plagued by hyperinflation, Venezuela has announced that the nation would be releasing oil-backed state cryptocurrency called the ‘Petro’. This has been done to help its struggling economy.

Background

Despite having world's largest proven oil deposits, many Venezuelans have lived in abject poverty. The former President, Hugo Chavez, was in office from 1999 to 2013. In that period, billions of dollars were spent in generous social programs. After his death, his successor, Nicolas Maduro took office. There has been a rise in inflation and a shortage of basic goods. A drop in the oil prices had added to the administration’s problems.

From 2014, there have been recurrent protests against the government because of many of these issues. Detractors blame the current economic policies for the crisis. People are also disillusioned by the high level of urban violence prevalent in the nation.

The protests have increased from 2017. There have been calls for fresh elections to remove United Socialist Party (PSUV) from power. However, the government remains as powerful as ever in the nation. Recently, a new constituent assembly was instated in Venezuela. The assembly is filled with Maduro supporters and has the power to re-write the nation’s constitution.

The nation’s economy has become increasingly unstable and there is hyperinflation in the region. In August 2017, CNN reported that 3,164 Bolivars was equivalent to $1. This is a problem because private banks let Venezuelans withdraw 30,000 bolivars ($2.88) from an ATM at a time.

The hospitals in the country are running out of medicines and they are unable to treat those admitted. A recent study revealed that at least 93% of Venezuelans cannot afford to buy enough food. The study also stated that 73% of the population have lost weight in 2017 alone. Reports note that people have taken to scavenging through trash.

Amid all the political turmoil, Venezuela's cushion of cash has fallen to its lowest point in over 20 years. Venezuela only has $10 billion in reserves. A nation’s reserves is the amount of funds it has to address any crisis and to ensure economic stability. Additionally, the nation has incurred $120 billion in debt.

In November 2017, Maduro announced plans to restructure the nation’s massive foreign debt. The restructuring effort will be led by Vice President Tareck El Aissami, who will also start "the fight against the financial persecution of our country," according to Maduro.

Analysis

The nation is also dealing with harsh financial sanctions that was issued by the US in August 2017. At the time, Treasury Secretary Steven Mnuchin said, “Maduro may no longer take advantage of the American financial system to facilitate the wholesale looting of the Venezuelan economy at the expense of the Venezuelan people.”

Plagued by hyperinflation, Venezuela has announced that the nation would be releasing oil-backed state cryptocurrency called the ‘Petro’. This has been done to help its struggling economy.

President Nicolas Maduro also noted that this cryptocurrency would combat the US-led financial “blockade,”. However, the President has provided little details on how the economically crippled Opec member would be saved with Petro. “Venezuela will create a cryptocurrency ... the ‘petro,’ to advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade,” leftist Maduro said during his weekly Sunday televised broadcast.

“The 21st century has arrived!” added Maduro. The nation has so far not provided any specifics on how and when this currency would be launched. Nor are there any details on how it would work and be distributed.  

Cryptocurrencies typically are not backed by any government or central banks. Bitcoin already has a strong following among tech-savvy Venezuelans looking to bypass dysfunctional economic controls to obtain dollars or make internet purchases.

Opposition met with this announcement with a healthy dose of skepticism. Some stated that this perhaps would not even say the light of day as details have not been released. “It’s Maduro being a clown. This has no credibility,” opposition lawmaker and economist Angel Alvarado told Reuters. “I see no future in this,” added fellow opposition legislator Jose Guerra.

Petro will be backed by oil, gas, gold and diamond reserves according to Maduro. He also noted that Petro would help Venezuela “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade.”

Assessment

Our assessment is that more governments will continue to begin adopting cryptocurrencies as the adoption rate and the value continues to rise among the general public. Venezuela’s announcement additionally indicates that the region has been hit by US sanctions. It is unlikely that Petro would be successfully launched in the near future as the nation grapples with a collapsed economy.