Venezuela: The World’s Case Study For Cryptocurrencies

People have been drawing lines in the dirt of the Earth for eons. It seems that no matter how the times change, people have always used lines to help them figure out where to go, who they are, and who they aren’t. If you look at the Earth from space, you can still see many of the old lines – the attempts of ancient cultures to define their borders or connect with faraway places. We have even codified our affinity for lines into our language. To “cross a line” is to overstep your boundaries, and to “read between the lines”  is to interpret subtext.

Our modern world has continued to draw lines, although less and less of them are being drawn in the dirt these days. The rise of digital technology has given people an entirely new realm for drawing lines. The world has truly become a planet where the lines in the dirt have been overlapped by the lines in cyberspace, and the intersections are where change is occurring fastest. One of the countries affected most by this phenomena is Venezuela, where the government’s mishandling of the economy is forcing more and more people outside the lines of traditional financial services. It would be a mistake to underestimate the plight of these people. Truly, things are very bad in Venezuela right now.

The Bolivarian Republic of Venezuela used to be the richest nation in Latin America. To this day, the nation sits on considerable natural resources, including the world’s largest oil reserves. Despite these advantages, however, the political climate in the nation has essentially destroyed the viability of the economy. Hyperinflation of the Venezuelan bolivar has become so gross that people are weighing the bank notes in buckets to buy and sell. Long lines, reminiscent of bread lines from the great depression, have become a regular part of shopping in Venezuela’s government subsidized grocery stores. The last digit on national identity cards is now being used to designate what days of the week people are even allowed to shop for food. Presently, many Venezuelans subsist on no more than a monthly salary from the government equivalent to roughly $14. Rather than risk having their bolivars evaporate under the heat of rampant inflation, more and more Venezuelans are turning to alternative stores of value to meet their day to day needs.

Setting the Stage for Cryptocurrencies in Venezuela

To better understand the situation in Venezuela, and the flight by many of its citizens to alternative stores of value like cryptocurrencies, ETHNews spoke with Dr. Harold Trinkunas. A native born Venezuelan, Trinkunas was formerly senior fellow and director of the Brookings Institution’s Latin America Initiative and is now associate director for research and senior research scholar at Stanford’s Center for International Security and Cooperation. Trinkunas told ETHNews:

“My understanding is that what is driving the interest in cryptocurrencies is a combination of an attempt to find an alternative store of value, separate from Venezuela’s domestic currency, and dirt cheap prices for electricity that makes mining for [cryptocurrencies] competitive with other jurisdictions around the world. Venezuela’s money supply doubled between March 2016 and March 2017, and the inevitable consequence of this is very high inflation, estimated at 800 percent in 2016. Access to traditional stores of value such as dollars and gold is highly restricted by the government, forcing the average person to go to the black market to purchase these, where Venezuela’s currency has been depreciating against the dollar at a staggering rate. In addition, Venezuela’s highly distorted economy, in which energy is so highly subsidized that it is practically free, makes it competitive for [cryptocurrency] miners to operate. The [cryptocurrencies] generated can be used to purchase scarce goods abroad for shipment to Venezuela. Keep in mind that not only is food scarce enough that malnutrition is a serious problem for the first time in decades, but most medicines are unavailable due to severe import restrictions by the government. So Venezuela is uniquely economically mismanaged compared to other South American countries, which together with highly subsidized electricity makes [cryptocurrencies] one of the possible lifelines for some Venezuelans who have the savvy to enter this market. This is not a combination that you are likely to see repeated elsewhere in the region.”

Although it is true that cryptocurrencies have the potential to intercede as a monetary system when traditional economies fail, the implications thus far in Venezuela have been confined to the individuals and small groups who possess the knowledge to leverage the technology to their benefit. However, the potential for these technologies extends far beyond affecting small communities, families, or individuals. The technology is so revolutionary that it could be used to potentially alleviate the entire national debacle (even corruption potentially).

One of South America’s most significant figures in cryptocurrencies and expert in the blockchain technology that underpins them is the Ethereum Foundation’s Alex Van de Sande, who told ETHNews about the ramifications blockchain technology could potentially have on governments like Venezuela’s. “It’s my belief that blockchains can help deeply by making public spending more transparent, and making sure once a government program has been decided on how to spend funds, these funds cannot be diverted elsewhere without proper approvals.” Van de Sande further elaborated upon the effects of blockchain technology in the private sector: “opening a new company takes months of work, lots of unnecessary fees, and tons of paperwork – and access to court systems is unreliable and expensive. Blockchain allows someone to create a company in minutes for a tiny amount and have a highly trusted system.”

Beyond both governmental applications and private industry, Van de Sande sees an even more fundamental use case for the technology:

“I believe blockchains have the power to make the internet itself a valid jurisdiction for organizing humans, [both as a] distribution resource and [for] resolving disputes. Cities and regions should compete to provide a better quality of life for their citizens on matters outside the digital realm.”

Hope for the Future

When Venezuelans first started using cryptocurrencies to augment financial services in their lives, they were taking a great risk. Their government, embroiled in a cycle of constant posturing to reaffirm its power base, had effectively used financial institutions as power proxies to shut down the nation’s largest digital asset exchange, Surbitcoin. Reports have attempted to explain why this closure occurred. However, nothing substantial has been revealed and rumors persist to this day. The spirit of the Venezuelan people, however, remains strong and there is hope for the future in the form of Venezuela’s newest crypto-exchange, Monkeycoin.

ETHNews had the opportunity to speak with founder and CEO of Monkeycoin, Gabriel Giannitsopoulos, about his difficult journey to establish a new digital asset exchange in Venezuela. “It all started one year ago when I sensed that the amount of people using [cryptocurrencies] in Venezuela was growing so fast, and the offer of [web]sites where to buy [cryptocurrencies was] limited. The general perception was that cryptocurrencies were in trouble with Venezuelan Authorities.” Giannitsopoulos took it upon himself to found another crypto-exchange and fought through months of interviews with officials from the SENIAT and several governmental ministries to gain the right to start again. Mr. Giannitsopoulos continued: “more months went by, and I got interviews with the institution that regulates banks, Sudeban. After many, many other interviews and talks, they decided to set a period of time where my company [would] be studied. The Venezuelan authorities understood that cryptocurrencies are simply unstoppable and are going to change forever the way we do business in our world. I showed them how the exchange works and how I got the engine of the exchange [from] a well-known and respected company from Germany, called Draglet, which has enabled our company, Monkeycoin, to achieve such a degree of impact to our economy. When I showed [governmental authorities] all the reports we could get from the back end engine provided by Draglet, reports like executions and reports of income of the exchange due to [transactions] between users, they loved that very much. Their main concern was to have a way of getting their taxes paid and at the same time make all companies working with crypto have strict Know Your Customer policies and adhere to all the existing anti-money laundering acts and laws already existing in the country. We were able to comply [and] they decided to give us the green light to start our business, with a warning to be legal and comply with all laws. Now we are implementing more cryptocurrencies like Ethereum, tradable for Venezuelan bolivares, and further cooperation continues – just like in Japan, Russia, South Korea, and many other countries which are letting FinTech companies blossom.”

Although small amounts of progress have been made towards helping the people of Venezuela find monetary alternatives, their condition and the condition of their nation remain in peril. Cryptocurrencies will undoubtedly have a role to play in repairing Venezuela’s economy. The size of that role will largely depend upon the courage of the people of Venezuela. If history is any judge of their character, the revolution is just getting started.