This is another captivating guest post by Eddie Mitchell. Eddie is a seasoned writer on all things Blockchain and crypto and we’re delighted that he has agreed to become a regular contributor to Rhetoriq.
Bitcoin and other cryptocurrencies have managed to go from a quirky financial tool on the fringes of technology to being widely acknowledged as a means to circumvent poor economic conditions in particular areas of the world.
From the very beginning, blockchain was utilized as a medium to transact value and only required a computer with an internet connection to interact with. This extremely simple premise provided by the foundations of brilliantly complex technology began to gain traction with emerging markets, third-world countries, and those in the midst of a financial crisis.
In Venezuela digital currencies are playing an extraordinary role in the nation that has been burdened by the impacts hyperinflation, making it one of the most historic ongoing use-cases of cryptocurrencies in humanitarian affairs.
In this first instalment, we’ll take a look at the economic crisis in Venezuela, the growth of cryptocurrency adoption and the odd events that have caused the situation to become a fascination to the world.
A Brief Timeline
Once a bustling South American economy, a high annual inflation rate in Venezuela had been reported in early 2014 by the Venezuelan central bank. At that time, it had risen 57.3 percent and it was thought by analysts that by September of 2014 this figure would break past 100 percent.
The chart below provided by Trading Economics displays the steady rise of inflation between January 25th, 2014 and January 25th, 2016. However, hyperinflation managed to remain dormant until November of that year.
In July of 2018, the International Monetary Fund (IMF) published an article on its blog writing: “We are projecting a surge in inflation to 1,000,000 percent by end-2018 to signal that the situation in Venezuela is similar to that in Germany in 1923 or Zimbabwe in the late 2000’s.”
The figure was then increased to 2.5 million percent and contested by renowned economist and professor, Steve Hanke, who in a Forbes article May 31st, 2018, criticized the IMF for this forecast. Most recently Hanke said in a separate article:
“…the IMF apparently expects that Venezuela will experience one of the world’s greatest inflation surges ever recorded in history over the next two months.” He adds, “Don’t bet on it. Your odds are much worse than winning the Mega Millions Jackpot.”
Naturally, the article caused news outlets around the world to react, drawing a great deal of attention to a crisis that appeared to be getting out of control.
A 2014 report from Reuters tells a story of how Venezuelans were already taking action and promoting bitcoin as an alternative to the Bolivar, with advocates working to educate locals on the technology and catalyze widespread adoption.
Since then, the volume of bolivars being traded for bitcoin via Localbitcoins grew a staggering amount and continues to climb to new heights as the situation worsens.
Venezuelans are becoming reliant on cryptocurrency, a comment posted on Reddit highlighted the dire situation that many are facing. The user describes hyperinflation as a “horrible monster”, and then goes on to explain that “bags full of cash” are used to pay for meals, and that Venezuela is becoming a cashless society.
As the poverty rate has grown from 48.4% in 2014 to 87% in 2017, it is any wonder what the government has been doing to aid the situation, other than print more money.
State-Backed Crypto Timeline
Perhaps the most controversial side of this story is that of the governments answer to not only the hyperinflation crisis but also the swelling of cryptocurrency adoption.
December 2017 – President Nicolas Maduro announces that Venezuela will be launching its own cryptocurrency called the ‘Petro’. At the time, Maduro said that the new state-backed digital currency would have its value guaranteed by Venezeualan reserves of gold, oil, gas, and diamonds.
In an attempt to skirt economic sanctions imposed by the United States, 100 million petro tokens would be issued via an initial coin offering (ICO).
Maduro specified that a single petro would be pegged to the value of a barrel of Venezuelan oil, which at the time was around $59 USD, approximating the total value of the offering to be just over $5.9 billion USD. Venezuela is home to one of the largest oil reserves in the world, and from this, it makes approximately 95 percent of its export revenue from oil according to OPEC data.
It didn’t take a particularly long amount of time before skepticism surfaced and forced the discussion down a less than favourable route for the Venezuelan government and its citizens.
January 2018 – The U.S Treasury Department spoke out against the soon-to-be-launched petro token and issued warnings to U.S investors with regards to its validity, and in February, the token was launched into its pre-sale phase. This lasted a month and according to the government, raised $5 billion USD; Steve Hanke was quick to criticize this also and in an interview with Slate, stated that there had been no independent audits of the ICO, giving the crypto-solution to hyperinflation zero credibility.
In what appeared to be a move to build confidence in the state-backed crypto, the Venezuelan Housing Ministry created a fund which would support approximately 2 million homeless people using the petro.
July 2018 – Although, a radical and unexpected turn of events occurred when President Maduro announced that the old and depreciating bolivar fiat would be replaced with the ‘Sovereign Bolivar’ on August 20th, 2018, the value of which would be tied to the controversial petro.
This move is considered historical by many, making it the first time in history that a national currency would be backed, by a cryptocurrency. Presently, confusion permeates the petro discussion, with investigators finding zero evidence of the material backing that the petro is supposedly tied to.
Part 2, Coping with Crypto
With there being no apparent value in the Bolivar, the petro or the sovereign bolivar, Venezuelans have flocked to bitcoin and other cryptocurrencies such as Dash to cope.
In part 2, we’ll discuss the humanitarian aid projects set up by blockchain and cryptocurrency advocates that liberating Venezuelans during these troubling times, as well as the increased level of crypto-payment infrastructure being introduced to support local businesses.