Published on March 28, 2018
Current political, social and economic conditions within Venezuela are dire. In July 2017, Harvard University’s Ricardo Hausmann calculated that gross domestic product has decreased by 40 percent since 2013 (Ricardo Hausmann). In February 2018, Reuters reported that annual inflation exceeded 6,000 percent (Reuters Inflation). On March 27, 2018, one Venezuelan bolívar was equal to 0.000020 US Dollars. In their latest poll Transparency International revealed that 76 percent of the respondents believe the Venezuelan Government is doing a bad job at fighting corruption (Transparency International). Finally, The Economist reported that 93 percent of Venezuelans can’t afford the food they need for adequate nutrition (The Economist Magazine). Economists point to the poor leadership on the part of Venezuelan President Nicolás Maduro, and, according to the Council on Foreign Relations, the country’s heavy economic dependence on oil revenue, which makes up 25 percent of GDP and 95 percent of earnings through export. When the price of a barrel of oil fell from $111 in 2014 to $27 in 2016, the Venezuelan economy suffered tremendously (Council on Foreign Relations). These are just a sampling of economic hardships driving Venezuela’s societal meltdown.
Recently, marketing hype surrounding blockchain technology hit a new low when it was reported that the Long Island Iced Tea company rebranded itself to Long Blockchain. According to Nasdaq, this drove a 200 % same day stock price increase and was a clear situation of the company taking advantage of the cryptographic currency/blockchain craze for marketing purposes. I believe this form of fraudulent marketing took place on a much larger scale with the publishing of the Petro Whitepaper (Petro Whitepaper) on January 30, 2018, describing the planned release and maintenance of the first national cryptographic currency by Venezuela, the petro. This currency is backed by oil, gas, gold and diamonds held within the country. A few months ago I wrote about the possibility of Russia circumventing international economic sanctions (McCalmont Sanctions), but it appears Venezuela has not only surpassed Russia in the creation of an alleged cryptographic currency, but is extraordinarily upfront about their underlying motives. Time Magazine reported that Maduro declared the petro a form of “kryptonite” to be used against the power of the US government and a tool to be used in his country’s fight against American “imperialism” (Time Magazine). The same Time Magazine story went on to report that senior advisors to Vladimir Putin’s government oversaw the implementation of the petro; Russia seems to be using this as a test case for their own cryptoruble. On March 19, 2018, the Trump Administration issued an Executive Order banning the purchase of the petro by all US citizens.
At the time of the rollout, at the last minute, Venezuela apparently switched the blockchain that the petro was going to “live” on from the Ethereum blockchain to the New Economy Movement (NEM) blockchain. This was a significant decision as the underlying blockchain technology is responsible for the core existence of any cryptographic currency. This last-minute change in blockchain protocol provided an opportunity for bad actors to exploit the confusion by scamming potential investors by redirecting them to counterfeit alternatives. Because the petro is backed by natural resources and other commodities held by the Venezuelan Government, the petro is more of a centralized currency based upon the “word” provided by a government versus the transparency built into blockchain architecture.
On March 9, 2018, The Brookings Institution released a paper (Brookings) discussing the potential reputational damage the petro could do to legitimate cryptographic currencies. The authors echo the Maduro statement that the country raised $735 million after the petro’s initial release; the presale allotted 82.4 million tokens (pegged at $60 per unit at the time of this writing). On March 20th, the currency was made available to the general public. Of note, many in the Venezuelan legislature critical of Maduro have called this currency nothing more than a “forward sale of Venezuelan oil” and point out that if Maduro loses the presidential election scheduled to take place this April, the petro could be ruled illegitimate. In their report Brookings expresses concern that this scheme to avoid economic sanctions facilitated by the Venezuelan Government could seriously harm the evolution of future cryptographic currencies, especially those currencies created by central governments. Those of you familiar with my previous posts know that I have been extremely critical of industry leaders who diminish the importance of this movement from a position of ignorance. When compared to the petro, I still believe the derogatory comments made by financial industry leaders such as Jamie Dimon, Larry Fink and Warren Buffett will have a far more negative impact on the development of cryptographic currencies as a normal part of everyday life (McCalmont Collateral Damage). In fact, I believe the creation and inevitable fall of the petro could be a positive factor within the greater cryptographic currency movement.
Several factors lead me to believe that cryptographic currencies could expedite Venezuela’s exit from political/social/economic chaos. Prior to Maduro’s rise to power, the country had a rather sophisticated interconnected financial services infrastructure. In one of my prior anti-money laundering roles, I remember having to closely monitor an exercise known as “permuta” (Spanish for “barter”). Permuta facilitated a parallel foreign exchange market within Venezuela, in which the country’s citizens could exchange Venezuelan bolívares into US dollars pending the transfer of Venezuelan backed bonds to US-based broker/dealers. Running a parallel foreign exchange - which, prior to 2010 was sanctioned by the Venezuelan government and ultimately declared illegal in 2010 - and involving US broker/dealers required a level of financial sophistication similar to that within the Latin American economic engines of Brazil and Argentina.
Currently, Venezuela is also a hub for blockchain activity. I have recently explored various options facilitating remittance and other payments into the countries of Guatemala and Nicaragua. These two regions are significantly behind the more established Latin American economies like Brazil, Argentina and at one time Venezuela. And yet, they have the potential to thrive economically based upon the “light” financial infrastructure required to facilitate access to the global economy via smartphone coverage. This phenomenon is also taking place within Venezuela despite their dire economic circumstances: peer-to-peer money transfers are thriving throughout the country. The currency exchange BitINKA transforms users into individual exchanges by facilitating the transfer of one sovereign currency into another sovereign currency, with bitcoin used as the underlying “vehicle,” or “common denominator” bridging the exchange. Financial company Abra relies on a network of individual “tellers” throughout Venezuela to physically exchange funds in person from local currency into cryptographic currency and vice versa. Both BitINKA and Abra are used throughout Venezuela, as the only tool required to participate in both of these ecosystems is a smartphone. Not only is Venezuela one of the leading Latin American countries exploiting the technology surrounding peer-to-peer currency transfers, it’s also engaged in the area of cryptographic currency mining. Because of the significant amount of oil reserves within Venezuela, the government subsidizes the power distributed to citizens, making it practically free. Venezuelans have used this benefit to fuel their ability (no pun intended) to mine bitcoin, ether and other cryptographic currencies that require proof of work. As of March 26th, according to Bitnodes, there are 7 active bitcoin mining operations throughout Venezuela.
Finally, another feature contributing to my optimism for the future of Venezuela is the status of financial technology development throughout the entire Latin American region. In March 2017, the Latin American Private Equity & Venture Capital Association (LAVCA) reported that within overall technology investment, financial technology (or fintech) dominated the total number of IT deals with 55 percent of total IT investment (LAVCA). A strong fintech culture surrounding Venezuela could bolster their internal drive for economic stability once regime change takes place and a more thoughtful economic policy prevails.
Because of the proven unreliability of the Venezuelan government, I believe that the currency President Maduro is marketing, by making claims similar to those made by Long Island Iced Tea, is just a desperate attempt on his part to do what he can to preserve his own rule. I further believe that this will not only help facilitate his ultimate downfall, but it will expedite Venezuela’s emergence from economic hardships. As illustrated through the petro’s troubled rollout, entry onto multiple sanction lists, centralized protocol, and failing societal, political and economic systems, the petro will not survive. The infrastructure-light nature of proven cryptographic currencies, combined with a financially sophisticated population and bolstered by the thriving nature of regional fintech adoption, will in fact allow Venezuela to emerge from economic chaos on an expedited basis. In other words, if legitimate cryptographic currency adoption is thriving to this degree under a repressive regime, once a political leader emerges with a mandate to repair Venezuela’s shattered economy, cryptographic currencies will play a major role in that operation. This will provide a dramatic lesson on how blockchain technology will revolutionize the world as we know it.