It’s easy to see why digital currencies might appear attractive to politically divided and economically strained nations like Venezuela. If every Venezuelan had invested his or her gross 2009 income of $11,500 into bitcoin, the investment would have been worth about $8.4 billion in May this year — per person.
In a nation which has gone through a dramatic economic downturn in recent months, the idea of simply multiplying the value of money without being restricted by banks or sanctions became a more realistic scenario last weekend when the socialist government announced its plans to launch an own digital currency, or so-called cryptocurrency.
The hope is that the new currency can bypass international sanctions and serve as an alternative to the country’s own now worthless bolívar or the U.S. dollar.
“Venezuela will create a cryptocurrency,” Venezuelan President Nicolás Maduro said on Sunday, according to Reuters. In a televised broadcast, Maduro provided few details of how such a currency — backed by oil and gas reserves, as well as gold and diamonds — would work in practice, and the plans were almost immediately criticized and ridiculed by the country’s opposition.
What’s behind the proposal?
The country’s efforts to catapult itself to the forefront of the cryptocurrency business are a sign of the economic pressure Venezuelans are facing. Economists say cash reserves are drying up, highly skilled workers are fleeing elsewhere and foreign investment is declining.
At the same time, hyperinflation has made the local currency, bolívar, virtually worthless — with devastating repercussions for the Venezuelan population, as The Washington Post's Mariana Zuñiga and Anthony Faiola reported from Caracas:
In Venezuela, a collapse in oil prices, along with nearly two decades of socialist policies, has sparked a severe recession and one of the world’s highest inflation rates. People often wait hours in line to buy bread. Prices for staples jump almost by the day. Medical shortages range from antibiotics to cancer drugs.
The government has blamed the economic downturn on U.S. sanctions, which have targeted Venezuelan leaders and certain other transfers. Repaying its debts has become increasingly difficult for Venezuela as exports or transactions have either been slowed down or entirely stopped, and the economic blockade could become even more comprehensive now that the European Union has agreed to impose similar restrictions.
In his Sunday statement, Venezuelan President Maduro said that the country was in a financial “world war” with the countries behind the sanctions. The use of a digital currency could help to “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade,” he said.
How would a government-backed digital currency look like?
The details of the proposal remained sketchy and it is uncertain to what extent the Venezuelan government has finalized preparations for the launch of a cryptocurrency.
Maduro announced that his government would set up a blockchain platform, which is needed to trade with digital currencies. Similar technology is already being used by start-ups around the world that offer alternative ways to transfer payments entirely online.
What’s new, however, is the direct link between the Venezuelan government and a digital currency. Unlike bitcoin, the Venezuelan version would be backed by and linked to a fraught economy.
Is Venezuela the first country to experiment with cryptocurrencies?
In Sweden — where cash transactions now account for less than 20 percent of all payments — the launch of a government-backed cryptocurrency has also been considered. Proponents of a state cryptocurrency there argue that the use of algorithms instead of banks would make transactions more efficient.
So far, government-led cryptocurrency experiments in Canada or China have been limited to certain types of corporate transactions and have not been open to citizens for more widespread use.
There is also no conclusive research on the impact of such a system on a country’s financial stability or the methodology needed to link a central bank with an autonomously operating currency. Many questions remain: Would government-led digital currencies still be anonymous? Would they be as volatile as their commercial counterparts? Who would verify transactions to prevent an abuse of the system for terrorist or criminal purposes?
What are the prospects of it working out?
If the experiment failed, it probably wouldn’t be due to a lack of interest among Venezuelans who have increasingly relied on existing cryptocurrencies in recent months as the bolívar rapidly continued to lose value.
“We’re seeing huge demand in Venezuela through inquiries in our support line, as more and more people join our forums and chat rooms, even on how-to YouTube videos that have popped up,” Ryan Taylor, the chief executive officer of cryptocurrency-focused company Dash Core, told Bloomberg back in June. Rather than changing their money into U.S. dollars, some Venezuelans have opted for the booming digital currencies offered by start-ups to invest savings or process everyday payments at grocery stores and restaurants.
But can the Venezuelan government become the world’s cryptocurrency trendsetter itself?
Among other things, it would require a socialist government to think like a start-up in a country where more than every third citizen lacks an Internet connection.