🇻🇪Venezuela Pegs to Crypto ⚖️The Case for Crypto — Cryptos for the Rest of Us

Apologies for the hiatus!

Markets have been hit hard over the last few weeks with ETH leading the charge lower to trade <$300. BTC holding up relatively well at $6,700.

🇻🇪 Venezuela Pegs to Crypto

What’s the Story?

Venezuela have pegged their national currency, the Bolívar to Petro. Along with it, they are pegging the minimum wage and pensions to the Petro. Petro is Venezuela’s cryptocurrency, supposedly backed by the nation’s oil reserves.

The country is currently experiencing hyperinflation. Prices are jumping over 50% every month. The IMF expects inflation to hit 1,000,000% by the end of the year. It appears the goal is to make the Petro a reference price for all economic activity in the country.

The new exchange rate devalued the Bolívar by 96%. This brings it in-line with the black market rate at which it was trading. President Maduro also pegged the minimum wage to “half a petro” which implies a 3,000% increase.

What’s the Petro?

The Petro is a cryptocurrency introduced earlier this year. It is a fork of NEM and supposedly backed by 5 million barrels of Venezuela’s oil.

The Petro allows Venezuela to circumvent global economic sanctions and sell its oil digitally. President Maduro has claimed that the token sale raised $735 million. There has been no proof of this raise yet.

Details of how the crypto is actually linked to oil reserves have been limited. This had led many to label it a scam. Soon after it was introduced, President Trump signed an executive order barring US based financial transactions involving the Petro.

Will this Work?

This is a smoke-and-mirrors operation typical of Venezuela — I’ll believe it when I see it

— Steve Hanke, professor of applied economics at Johns Hopkins University.

This is a devaluation of the currency masked by a peg. Pegging to the Petro doesn’t change the underlying causes of inflation.

There are still many questions around the Petro itself. Beyond that, given that it doesn’t trade on any exchanges it doesn’t seem like switching from the Bolívar to the Petro will change Venezuela’s access to global capital markets either.

⚖️ The Case for Crypto

Venezuela offers an interesting case study into the libertarian ideals that spawned Bitcoin.

The Problem with Fiat

Fiat currencies are controlled by a government. The government can choose to devalue fiat currencies by printing more. This increases the supply and results in inflation. This devaluation essentially takes a portion of money from each existing holder of the fiat currency and transfers it to the government to spend.

Modern central bank policy is to encourage moderate inflation to spur economic activity. Under normal circumstances the economic growth outweighs the devaluation of the currency.

In times of economic strife however, governments have a tendency to keep printing money to pay the bills. This results in hyperinflation like we’re seeing in Venezuela now, and like we saw in Zimbabwe a few years ago.

Enter Crypto

The very first Bitcoin transaction made by Satoshi Nakamoto had the following message attached to it;

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

This is a headline from The Times on the same day. The implication is that Satoshi Nakamoto was against such government intervention in private markets.

Since then, this ethos has underpinned a lot of the crypto sphere. ‘True believers’ will tell you the reason crypto is so powerful, is because it’s beyond the control of any central authority.

While central banks can almost unilaterally devalue a currency, cryptos supply changes are programmatically determined.

Fundamentally, this is why much of the community rails against centralised tokens such as Ripple or NEO.

The Problem with Cryptos

Of course, cryptos come with their own issues. Arguably, a deflationary currency like Bitcoin dampens economic activity. This was the case made against the gold standard which led to the rise of fiat and fractional reserve banking.

The volatility of cryptos has also been cited as a reason it could never be used a standard currency. While this holds true vis-a-vis stable reserve currencies, given that the Bolívar has just ‘dropped’ 96% overnight it appears this characteristic isn’t unique to cryptos.

In any case, time will tell whether decentralised cryptos will ever manage to replace centralised fiat currencies. If they do, expect it to happen in countries like Venezuela or Argentina where there are currency crises and a thriving black market for reserve currencies like the USD.