Venezuela's crypto problem is not unique to them

Venezuela's crypto problem is not unique to them

It is not very easy discussing the future of cryptocurrency as a practical, day-to-day monetary system without looking at real-world examples. And when it comes to real-world examples, one cannot ignore Venezuela. As one of the first - if not THE first country - to officially launch a government-backed cryptocurrency, there is a lot to be learned from the Venezuelan experiment.

Venezuela's foray into cryptocurrency truly is an experiment in every sense. It is an experiment that was birthed out of a systemic economic crisis. It is one that has revealed a fundamental problem in Venezuelan leadership: the desire to have it both ways. For the record, the problem is not unique to Venezuela.

It may be that cryptocurrency eventually replaces fiat as the default payment system for routine consumer transactions. A lot of people are rooting for it in that regard. But can such commonplace economic activity exist side-by-side with other activity controlled by government entities and central banks? If Venezuela's experiment sets the standards, no.

The history of the crisis

In an attempt to better understand the Venezuelan problem, let us step back and take a quick look at the history of the country's ongoing crisis. Venezuela was the economic envy of South America a few decades ago. It had one of the highest standards of living in the hemisphere thanks to rich oil resources and a welcoming business environment.

That all changed when Hugo Chavez won the presidency in 1999. Chavez brought with him a socialist-progressive political view that gradually took control away from the private sector and turned it over to the government. Two decades after Chavez rose to power, and six years after his death, Venezuela's economy is mired in tragic devastation.

A number of years ago, the U.S. imposed sanctions against Venezuela in an attempt to oust current president Nicolas Maduro. Shortly thereafter, president Donald Trump froze all Venezuelan assets in the U.S. and prohibited the banking sector from doing business with any Venezuelan companies tied to the national government. The result was the complete collapse of the Venezuelan bolivar. Money that was already of little value essentially become completely worthless.

That led Maduro to get behind a cryptocurrency project that would be developed and sanctioned by Venezuela's central banking authority. Maduro believed that converting his nation's economy to a digital currency would allow him to get around U.S. sanctions so as to participate on the world market. He thought a state-backed crypto would also make it possible to start selling oil again.

It has not worked out

Much to Maduro's surprise, his plan has not worked out. Outside observers are not as surprised as Venezuela's president. After all, there is plenty of history indicating that Maduro's policies are unworkable regardless of how currency is represented.

The problem in Venezuela is that the government wants it both ways. Maduro and his regulatory partners are dead set against cryptocurrencies like Bitcoin, Litecoin, and Ethereum. They are reticent to allow outside exchanges to come in and set up shop. They do not want people trading alt coins on local peer-to-peer networks.

On the other hand, they are staunch supporters of the government-backed crypto known as Petro. If you are dealing with Bitcoin, nothing about it is good or right. But if you're dealing with Petro, it can do no wrong. This sort of posturing makes it clear that Venezuela's government really has no opinion about cryptocurrency one way or the other. Their only concern is one of finding ways to prop up their economy without giving up control.

Venezuela's crypto reality

So what is the state of cryptocurrency in Venezuela? Venezuelans love crypto, for sure. They love it so much that they trade it regularly on local networks. Many Venezuelans hoard cryptocurrency to protect themselves against the hyperinflation that continues to eat away at any wealth they have left. Furthermore, those who have left Venezuela for greener pastures routinely send remittances back home via crypto.

That is all well and good except for one problem: Venezuelans aren't engaging with Petro. Bitcoin is the cryptocurrency of choice in Venezuela. Consumers are not afraid to trade other tokens either. The only one they seem to be staying away from is petro.

This reality does not sit well with Maduro and his government. As such, crackdowns on non-petro tokens have gradually increased. The government has aggressively tried to persuade people not to trade coins on local networks. Maduro has even gone as far as to convert some government employee pensions to petro and instruct the nation's banking system to accept and facilitate petro payments.

Petro is, for all intents and purposes, a failed project at this point. But it would seem that the Maduro government is on its way to eventually eliminating the bolivar and forcing the nation's citizens to do business in petro. Achieving that end would also require outlawing the U.S. dollar in Venezuela. Why? Because the dollar is still the preferred currency for daily commerce.

Pick one or the other

It is clear that government leaders in Venezuela want things both ways. They want the freedom and benefits of a cryptocurrency system without giving up the control they have long enjoyed over the bolivar. But as with so many other aspects of life, you cannot have it both ways. It doesn't work. You have to pick one or the other if you have any hope of success.

A true cryptocurrency brings a lot of great things to the table. For starters, it is decentralized. That means a cryptocurrency platform is self-governed. Its network is maintained by nodes that reap rewards for the work they do. Supply and demand controls prices while consumer adoption controls its use in the marketplace.

For any government to subordinate its fiat to a genuine cryptocurrency, there would have to be a commitment among leaders to surrender control. Why? Because a true cryptocurrency works outside of government regulation and central bank control. This takes us back to the concept of not being able to have it both ways.

If you are going to issue a government-backed cryptocurrency over which said government and its central bank retain control, what's the point? All you've done is create a digital equivalent to your fiat. That is hardly worth doing when you consider the limitations of cryptocurrency and blockchain technologies.

A universal problem

A careful analysis of world politics reveals that Venezuela's cryptocurrency problem is a universal problem. No matter where you go, governments entertaining the possibility of a digital currency are wrestling with how much control they want to maintain. And in almost every case, the answer is the same: governments want to retain 100% of the control they now exercise over fiat.

This universal problem leads to the inevitable reality that true cryptocurrency is not going to replace fiat. Bitcoin, Litecoin, and all the rest will continue to thrive as alternative monetary systems and payment platforms. People will keep using them as they do now. But cryptocurrency will never be a full replacement for fiat.

In reality, Petro isn't a true cryptocurrency. It is a government-backed, government-established stablecoin that relies on the value of Venezuela's oil assets to remain economically viable. Petro is controlled by Venezuela's central bank under the authority of the Maduro administration. Any consumers or merchants that decide to do business in petro must do so according to government standards.

The same everywhere you go

Let's say China succeeds in launching their digital currency early in 2020. Is there any reason to believe it will be structurally different from Venezuela's? No. Is there any reason to believe that China will suddenly give up complete economic control and turn it over to the people instead? No.

Take that same scenario and apply to any country. It wouldn't matter whether you were talking about the United States, Canada, the UK, France, or Germany. You would find the same scenario everywhere you go. They would follow the same model in Russia, Japan, Australia, Argentina, Mexico, and Bolivia.

The fact of the matter is that controlling the money means controlling economics. And unfortunately, politicians have discovered that controlling economics controls the people. A decentralized cryptocurrency takes control away from government and puts it back into the hands of the people. Indeed, that was one of the goals for Bitcoin when it was originally developed.

Venezuela's cryptocurrency problem is one of wanting it both ways. The Maduro government wants to utilize Petro as a way of restoring its own economic freedom on the world stage. They want Petro to level the playing field in order to minimize the harms U.S. sanctions have caused. Yet at the same time, the government does not want to give up economic control in its his own country. It is an illogical juxtaposition.

Those of us who believe in the potential of cryptocurrency also believe in the potential of economic freedom. Our mindset is one of allowing people to take control over their own economics as much as possible. When you do that, great things happen. It is too bad so many world leaders do not see it that way.

Byline: This article was published by Henry.
About: I'm a bitcoin advocate and admin of Coinbet.com.