ViaBTC｜From Petro to Military Mining, the Crypto Path of Venezuela
Following El Salvador’s adoption of Bitcoin as a legal tender, many other Latin American countries also begin to embrace Bitcoin and cryptocurrency technologies. Yet, before El Salvador’s announcement, Venezuela has also taken a proactive stance on cryptocurrency. Further, this South American country is one of the first nations to issue cryptocurrencies.
When folks speak of Venezuela, apart from rich oil reserves, the shoddy fiat money system comes to mind. Back in 2014, the Federal Reserve phased out quantitative easing after the successful government bailout during the subprime mortgage crisis. Dollars previously dumped around the world gradually flow back to the United States, and as a result, the purchasing power of the U.S. dollar became stronger and the international oil price plummeted. The fiscal position of Venezuela, where the oil sector contributes 80% of the national GDP, deteriorated rapidly.
To save the declining economy, like other countries, Venezuela also started to adopt quantitative easing, dumping huge amounts of currency into the market. Yet, for Venezuela’s single-product economy, such an approach will only make things worse. Quantitative easing directly led to soaring domestic inflation, which peaked at 830,000%. The fiat money Bolívar suffered a drastic move downward. Even scrap paper is more valuable than the Bolívar cash: $1 now converts to more than 4,000,000 Bolívar.
Because of the collapsed fiat money system, recognition of Bolívar among Venezuelans is falling, and people turn their attention to cryptocurrencies such as Bitcoin. In Venezuela, many stores support payment with cryptocurrencies. One can tell that for Venezuelans, even potentially more volatile cryptocurrencies trump Bolívar, a legal tender that may plummet at any time.
To cope with this dilemma, the Venezuelan government had announced the official issuance of Petro, the world’s first sovereign cryptocurrency. Petro was issued on Ethereum with an initial supply of 100 million. Additionally, every Petro is backed by one barrel of crude oil in Venezuela. However, soon afterward, the U.S. government banned the purchase, use, and trade of this cryptocurrency issued by the Venezuelan government.
Not long after the launch of Petro, Maduro, Venezuela’s president, went back on his word and pumped the value of one Petro from the initially announced 3,600 Bolívar to 9,000 Bolívar. The manipulation of price shattered the cryptocurrency’s credibility, and as a result, the Venezuela-backed Petro failed to address the problem of Bolívar inflation.
Apart from this self-issued cryptocurrency, Venezuela’s stance on crypto mining is also ambiguous. Last year, Bitcoin mining was announced legal by the government, and thanks to its rich oil reserves, Venezuela has become one of the countries where Bitcoin mining might flourish. According to the 2018 report on global mining cost, the country has the world’s lowest mining energy consumption. In Venezuela, the power cost for mining one Bitcoin stands at $531, whereas in South Korea, the country with the highest cost, mining one Bitcoin burns $26,170 worth of power.
In addition to Venezuela’s official acknowledgment of legal mining, even the government itself is engaged in the activity. Last November, the Venezuelan military posted an Instagram video, which featured the transformation of their military camp into a mining center. From the video, it is clear that the Venezuelan military is building Bitcoin mining centers, and it also demonstrates the strong government backing of Bitcoin in the country.
Internationally, as a major oil exporter, Venezuela has been curbed by the U.S at every turn. Domestically, the country is in a tough economic position. It is therefore understandable that, under the unstable monetary policy, the Venezuelan government and the public are keen on the crypto sector. Compared with the risk of 10% Bolívar inflation every week, highly volatile cryptocurrencies are deemed as a more reliable way to store value. Although it remains difficult for cryptocurrencies to penetrate the slum areas as a payment method, to some extent, the government’s support of the crypto sector facilitates Venezuela’s transformation towards an economy driven by more diversified industries. Plus, it is also a way to minimize the economic impact of U.S. monetary policies.