Overlooking the state-issued petro, Venezuelans are turning to bitcoin as a way to access U.S. dollars and bypass the government’s strict foreign exchange controls.
One Worthless and the Other Useless… Venezuelans Don’t Want Their Own Currencies
With the local fiat currency, the Bolivar Fuerte (VEF), in a rapid tailspin against the dollar, Venezuelans are suffering a depreciation-hyperinflation loop. Inflation in the country was estimated to have been a staggering 10,000 percent last year, and worsening. Recent figures suggest VEF hyperinflation has ballooned to almost 120,000 percent (annualized) since November last year.
Venezuela is starved of much-needed dollars due to the crippling sanctions it faces and its economic collapse under the belligerent Nicolás Maduro government. As demand for U.S. dollars increases, the Fuerte depreciates further, driving prices of imports up in local currency terms. That leads to further inflation, instigating a vicious cycle.
Turning to Cryptocurrency… but Not the Petro
Venezuelans have turned to cryptocurrency to evade capital controls and access dollars. Many use peer-to-peer networks such as localbitcoins.com in order to evade law enforcement. According to Venebloc, a website that tracks VEF to bitcoin transactions, daily transaction volumes are reaching one million USD.
The Maduro government launched a national cryptocurrency, the petro, in February. Claiming to have raised $735 million on its first day of trading, the President announced “Today, a cryptocurrency is being born that can take on Superman.” One petro is supposedly backed by a barrel of oil. Venezuela boasts proven oil reserves of 297 billion barrels, surpassing even long-standing oil reserve leader, Saudi Arabia. Additionally, it is estimated to possess oil sands deposits exceeding 1,000 billion barrels.
Given Uncertainty Surrounding the Petro, Bitcoin Is the Only Gateway to “Proper Money”
The petro is obtainable through cryptocurrencies and foreign fiat currencies, including the dollar and the so-called “economic future of the planet” currencies: the yuan, rubles, Turkish liras, and euro. Venezuelans can buy petros, but not with the local currency. However, Venezuelan citizens need official approval to sell Bolivars for dollars, with many instead turning to the black market to do so. Black markets tend to be less bureaucratic.
The petro was designed by the government to help the country skirt U.S.-led sanctions. Venezuela audaciously offered to pay Russia in petros for spare parts for trucks, leaving the two allies in an awkward position. The Russians didn’t want petros. The Venezuelan government has offered no evidence to support its assertion that it sold petro coins to the tune of $735 million on day one and has a history that renders it difficult to trust.
Largely out of reach of Venezuelan citizens, only useful for paying taxes in Venezuela, and illegal for nationals of countries included in the sanctions against Venezuela, petros are likely doomed. Esteemed economist Professor Steve Hanke has warned investors to steer clear:
Anyone who would waste money on such an obvious sham is a fool. Maduros's "Petro" is just another elaborate pump-and-dump scheme. https://t.co/BcyytTBHU5
— Prof. Steve Hanke (@steve_hanke) February 18, 2018
Sobering… but a Use Case Nevertheless
With a million dollars worth of Bolivars leaking from the hyperinflation-ravaged South American nation daily, bitcoin is demonstrating one very practical use case – evading state incompetence and a regime’s frenzied addiction to the VEF printing press. While hardly an inspiring argument for cryptocurrency adoption, the Venezuelan situation harkens back to the raw hex version of bitcoin’s genesis block, which famously includes the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.