Poor Venezuela. What a mess. The bolivar has been hyperinflating since November 2016 when the dollar peg failed: according to the latest estimate from currency expert Steve Hanke, inflation is currently running at 80,000% per annum. Both the government and the state-owned oil company are in default on dollar-denominated debts. The economy has now been in deep recession for five years and there is no sign of recovery. The poverty rate is an astonishing 90%. Starving Venezuelans are leaving the country in droves.
Back in August, President Maduro tried to end the hyperinflation. He devalued the bolivar by 95%, lopped five zeros off the face value of banknotes, and pegged the bolivar to the petro, the state-issued oil-backed “cryptocurrency” that he had created earlier in the year. The new-look bolivar is now known as the Sovereign Bolivar (VES).
But it didn’t work. The petro was already widely regarded as a joke currency, so it was hardly going to be a credible anchor. And as Zimbabwe could have told Maduro, lopping zeros off the face value of the currency doesn’t stop hyperinflation. Unless there is drastic monetary and fiscal reform, hyperinflation simply continues from the new base.
Sadly, raising the minimum wage by 58% is not the kind of fiscal reform that will end hyperinflation, either. Even left-wing economists thought it was a bad idea: the Guardian’s Larry Elliot, for example, complained that the minimum wage increase would lead to even higher inflation and more company failures. How right he was. Hyperinflation is indeed worsening, along with the rate of company failure and the diets of Venezuelans.
But President Maduro is not one to learn from his mistakes. In November he raised the minimum wage again, this time by 150%. Simultaneously, he raised the price of the petro from 3,600 VES to 9,000 VES. (Yes, the petro is a “cryptocurrency” whose price is set by government. It really is a joke currency.) It’s not hard to imagine what happened to the inflation rate.
The fact is that stopping hyperinflation requires radical monetary reform, accompanied – as Larry Elliot observed – by equally radical economic reforms to restore business and consumer confidence. In a Forbes post back in April 2017, Steve Hanke outlined two alternatives for monetary reform: one is to replace the bolivar with a hard currency such as the U.S. dollar, and the other is a currency board. In a strict currency board, the currency is pegged to a hard currency and backed 100% or more by reserves denominated in that hard currency, typically government bonds. Thus, all roads to sound money in Venezuela appear to lead to the U.S. dollar, though the Euro could be an alternative.
Unfortunately, neither dollarization nor a currency board are remotely acceptable to Maduro’s socialist government. While it remains in power, therefore, hyperinflation seems likely to continue.
But – could there be an alternative? Could a decentralized, anonymous cryptocurrency such as Bitcoin enable Venezuelans themselves to bring hyperinflation to an end? Bitcoin trading in Venezuela has exploded in recent months: in one week in early December, Venezuelans traded nearly 1300 BTC. That’s worth $5.1 million, or 2.35 billion of Venezuela’s shiny new (hyperinflating) Sovereign Bolivars. Perhaps this is the start of Venezuelans taking matters into their own hands?
Time magazine seems to think so:
Today, Venezuelans are adopting and experimenting with Bitcoin to evade hyperinflation and strict financial controls. Speculation, fraud, and greed in the cryptocurrency and blockchain industry have overshadowed the real, liberating potential of Satoshi Nakamoto’s invention. For people living under authoritarian governments, Bitcoin can be a valuable financial tool as a censorship-resistant medium of exchange.
And it goes on to explain how Venezuelans are using Bitcoin to move money in and out of Venezuela, evading both government controls and the high fees imposed by conventional banks:
It’s now possible to send a text message to your family asking for bitcoin, and receive it minutes later for a tiny fee. Government censorship isn’t possible, as bitcoin isn’t routed through a bank or third party and instead arrives into your phone wallet in a peer-to-peer way. Then you can, moments later, sell your new bitcoin into fiat through a local Craigslist-style exchange, or load it onto a flash drive (or even memorize a recovery phrase) and escape Venezuela with complete control over your savings. A popular alternative – have your family wire money to a bank in Colombia, walk across the border to withdraw, then walk back to Venezuela with cash in hand – can take far longer, cost more, and be far more dangerous than the Bitcoin option.
It’s exciting to think that cryptocurrency could empower the citizens of a failed state, isn’t it?
But I look at President Maduro’s growing authoritarianism, and I can’t help feeling this will not end well. It is simply not credible that he would simply stand by and allow Bitcoin to replace the elaborate currency structure that he has created. Although Bitcoin itself is censorship-resistant, access to it is not. Using Bitcoin requires a smartphone and an internet connection, both of which can be outlawed or simply rendered unusable by an authoritarian government. Unregulated local exchanges can be forcibly shut down and their operators imprisoned. Businesses can be told not to accept bitcoin on pain of closure, asset seizure and imprisonment of both management and staff. Ordinary people could be beaten up, imprisoned or killed for being caught using Bitcoin. There is no doubt in my mind that Maduro would if necessary resort to violence and repression to prevent widespread adoption of Bitcoin.
And as for adopting Bitcoin as Venezuela’s new currency, or pegging VES to it – dream on. The fact that Maduro created a “cryptocurrency” fully controlled by his government should tell you that this is a non-starter. Maduro is a control freak, and Bitcoin is not under his control.
And for these reasons, although I really wish Bitcoin could solve Venezuela’s hyperinflation problem, I fear it can’t. Bitcoin requires freedom, but it can’t create it.
But that doesn’t mean Venezuelans can’t take matters into their own hands. They don’t need a cryptocurrency, they need a revolution. Who will lead them?
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