Is Blockchain the Answer for Venezuela?
Desperate times call for desperate measures, and the creation of Venezuela’s very own cryptocurrency backed by oil certainly reeks of desperation. But who can blame the government of President Nicolas Maduro — who is overseeing one of the worst economic downturns of recent history — to go out on a limb with blockchain? Whether or not it works for the South American nation is the one million percent inflationary question.
Hyperinflation spells disaster for any country’s economy. One only needs to look at Zimbabwe at the turn of the millennia, or the downfall of Weimar Germany in the 1920s, to see the political ramifications of governments that spend money they do not have, and a populace that holds onto cash they cannot use. It is more than an economic collapse — it is concurrent with societal collapse. This is what is happening right now in Venezuela. Medicine and food shortages have plagued the South American country as it enters its ninth year of hyperinflation.
The International Monetary Fund estimated last year that Venezuela’s inflation rate would reach one million percent by the end of 2018. Maduro needs to act, and he has chosen blockchain technology to revive his economy. For the first time in history, hyperinflation has occurred in the age of digital currency — so, could blockchain be the answer for Venezuela?
The Petro was announced at the end of 2017 in an attempt to supplement Venezuela’s former currency, the Bolivar Fuerte, and help overcome US sanctions. According to Aljazeera, Venezuela has allocated five billion barrels of oil to back its new digital currency (Petro), which is tied to the cost of a barrel of Venezuelan oil. In this way, the Petro acts more like a security token than utility cryptocurrency. Further, the Petros will be “pre-mined” to allow the government to produce and control the supply.
Will it work, however? The rollout thus far has had some limitations. Some reports suggest the cryptocurrency and the oil reserves backing it may not exist. The whitepaper published by the Venezuelan government for the Petro shows a striking resemblance to cryptocurrency, Dash. Further, as reported by CoinTelegraph a couple of months ago, the coin has not yet been listed by any of the major exchanges and is having difficulty gaining acceptance by Venezuela’s allies.
Perhaps more important than blockchain creation is blockchain adoption. The fall in fiat has prompted a flourish in cryptocurrency for Venezuelans. In fact, Bitcoin reached all-time trading volumes in Q1 of 2019, and saw the government announce new fees in an effort to regulate cryptocurrency remittances. Further, Dash counts the South American nation as its second-largest market for payments with clients including brand names like Subway and Calvin Klein.
Whatever happens, this is uncharted economic territory. What kind of role can cryptocurrency play in an economic emergency? Can it save an economy dogged by financial mismanagement? Time will tell, but, for better or worse, the Petro has a chance at becoming the largest example of blockchain’s impact on an entire country.
The turn to blockchain is likely to have a longer-lasting cultural impact than an economic one. In the midst of this crisis, Venezuelans have turned to cryptocurrency and blockchain technology for its utility. It will be interesting to see how this evolves once the country’s fortunes do turn around. Nonetheless, the creation of the Petro is a fascinating experiment which will no doubt offer a future case study for nations who find themselves in the throes of hyperinflation.
