People have offered all sorts of reasons for delving into cryptocurrency since Bitcoin was released more than a decade ago. Everything from online shopping to gambling and investing have been proposed as reasons to trade in some fiat for intangible bitcoins. Now there is another reason, at least if you live in Venezuela. Economist and business finance expert professor Aaron Olmos believes that crypto could save his nation's beleaguered bolivar.
Years of hyperinflation have left the bolivar largely useless for everyday purchases. Whatever fiat Venezuelan citizens can get their hands on is typically hoarded, just in case. According to Olmos, Venezuela's brand-new state-backed cryptocurrency could be the solution. He believes that it could help restore the value of the bolivar if the Venezuelan government embarks on a plan similar to a plan implemented in Brazil back in the 1990s.
While you and I might think of crypto mainly in the realm of depositing bitcoins to e.g. gamble online, there are some very smart people who think that cryptocurrency could be the solution to the economic woes in many parts of the world. Whether or not they are right remains to be seen. What we do know is that there are people in positions of power who genuinely believe it is time to start recognizing crypto as a valid fiat alternative.
Economics in Venezuela
Venezuela's used to be one of the strongest - if not the strongest - economies in South America. They were an oil export powerhouse on par with Russia and many parts of the Middle East. The country was populated by a significant middle class who enjoyed a comfortable lifestyle in the midst of oil-backed prosperity. All of that has since changed.
The Venezuela of today is quite different. Once thriving businesses have been shuttered, food shelves routinely run bare, and nationwide power outages are common. People do not have money to buy what few goods are available. And when they do need to purchase something, the amount of cash necessary to complete the transaction is astronomical.
Things are so bad now that the only fiat currency of any real value in Venezuela is the U.S. dollar. As previously stated, the bolivar is worthless. As its value continues to decline against the dollar, the disparity between the two increases the drag on Venezuela's economy. Thus Olmos believes that cryptocurrency could be the salvation of the Venezuelan economy.
The State-Backed Petro
As we have mentioned numerous times in recent blog posts, Venezuela officially released its state-backed cryptocurrency - known as Petro - in the autumn of 2018. The petro coin is so named because it is backed by the country's oil industry, an industry owned and controlled by the state.
Venezuelan leaders have also made significant regulatory changes in order to encourage citizens to acquire and spend petros. The nation's regulator, Sunacrip, was recently given greater authority to regulate cryptocurrencies with the intention of dissuading citizens from using anything but the petro for day-to-day business.
Sunacrip has seized its new authority by coming up with new rules for Bitcoin. It just so happens that Bitcoin is the most popular crypto in Venezuela among investors and crypto-based businesses. It is now subject to licensing rules, taxation, etc.
Meanwhile, leaders are all but begging citizens to buy and spend petros. Whether they use fiat or bitcoins to purchase their petros doesn't seem to be an issue. The government just wants citizens to start using their coin. Why? Leaders haven't said for sure, but Olmos may have been onto something in comments he recently made in an interview with CoinDesk.
Following Brazil's example
Olmos explained that Venezuela's economic woes are the result of multiple factors all working together. First is the general economic decline brought on by state seizure of the oil industry a few years back. Next is the falling value of the bolivar against the U.S. dollar. Third, and most surprisingly, is the relative popularity of cryptocurrency in Venezuela.
According to Olmos, the acceleration of cryptocurrency's adoption has led to fewer and fewer people even being interested in the bolivar. As the thinking goes, its value continues to fall if merchants don't want it and citizens can't get it. Yet cryptocurrency is something everyone seems to agree on. That brings us to Olmos' proposal of doing something Brazil did back in the 1990s.
Rescuing the Cruzeiro Real
Back in the early 1990s, Brazil faced an economic crisis on par with what Venezuela is going through today. By late 1993, inflation in Brazil hovered around 1200%. The nation's legal fiat currency wasn't worth the paper it was printed on. In an effort to rescue their currency, leaders turned to an idea originally floated in 1984.
They created what they called Unidade Real de Valor (Real Value Unit, or URV) to act as a parallel currency alongside the cruzeiro real. The URV was given a value of CR$ 647.50 on opening day, which was February 28, 1994. Its value was pegged to the U.S. dollar as well.
Pegging URV to the U.S. dollar gave Brazilian citizens confidence to use it. The government boosted that confidence by slowly increasing the value of URV over the course of the next several months. The URV's daily growth actually encouraged people to obtain it and use it for day-to-day expenses. Merchants were more than happy to accept it, too.
The plan culminated with conversion to fiat some 18 weeks later. On July 1, URV was renamed Real and became the country's official fiat and legal tender. The cruzeiro real then retired. It took the government just 45 days to replace all of the old money with the new real.
Breaking the cycle of inflation
At first glance it doesn't seem reasonable that inventing a new currency out of thin air should restore a nation's economy by taming inflation. After all, currency only has value as long as buyers and sellers agree to that value. So what was the deal with URV back in 1994? Why did it accomplish exactly what Brazilian leaders hoped to accomplish?
Olmos says that it broke the cycle of hyperinflation by changing the attitudes people had about money. His thoughts echo those of the two individuals responsible for the theory behind the URV, Pérsio Arida and André Lara Resende.
What is now known as the 'Larida Plan' was based in the knowledge that hyperinflation and economic stagnation cannot be overcome if people have no confidence in the legal tender they use to pay their bills. A lack of confidence only causes people to hoard cash. And when they do that, a central bank has to print more bills to keep cash in circulation. This combination of no-confidence and money printing only makes the cash worth less which, in turn, sparks more inflation.
As you can see, the combination of hyperinflation and lack of confidence creates a vicious cycle that only spins faster with each passing day. That cycle has to be broken if the economy is to be stabilized. Olmos says that introducing the URV did that for Brazil two decades ago.
Breaking the cycle in Venezuela
Olmos believes that Venezuela can achieve the same kind of success with the petro. He believes the petro has the potential of stabilizing Venezuela's economy by giving people a cryptocurrency they can actually believe in. If leaders can just get people to buy and sell with it, Olmos believes monetary policy could then be adjusted in order to gradually bring value back to the bolivar.
If Olmos' theory is correct, why can't the same thing be accomplished with Bitcoin or some other globally accepted cryptocurrency? For starters, Bitcoin's price is such that it is out of reach for the average Venezuelan. Investors and crypto-based businesses can afford it; the average citizen cannot.
Other cryptocurrencies with a much lower price tag could theoretically be used similar to how the URV was used in Brazil. But none of those coins is backed by the Venezuelan government. None of those coins has any backing whatsoever. The petro does.
The petro is not a pure cryptocurrency in the same sense that Bitcoin and Litecoin are. Rather, it is a stablecoin backed by a physical asset - the state-owned petroleum industry. It has intrinsic value because it has real production and physical assets behind it. This theoretically gives Venezuelan citizens confidence to use it.
A new Venezuelan economy
So, will Olmos' proposal come to fruition? There is no way to know right now. However, it seems as though Venezuela is moving in that direction. Sunacrip is working to control the popularity of Bitcoin while at the same time encouraging businesses to invest in cryptocurrency.
Assuming that the petro becomes the default payment system by the start of summer, Venezuelans could be looking at a whole new economy by January 2020. That's not to say things will return to what the country knew a decade ago, but the economy could be on ground that is much more solid. It really boils down to whether or not citizens will be convinced that the petro has more value than the bolivar, the U.S. dollar, and rival cryptocurrencies.