Every six months or so, I have the unpleasant job of dissecting Venezuelan President Nicolas Maduro’s latest currency reforms. Almost like clockwork, a couple of times a year Maduro will announce some big initiative intended to fix the disaster zone that is Venezuela’s beleaguered currency, the Bolivar (BsF).
This time, we’ve been served up something a little more interesting than the usual promises to tinker around the edges of the failed forex system. Last weekend, Maduro declared his government will create its very own crypto-currency. Dubbed the “Petro”, this Venezuelan attempt to emulate Bitcoin was promoted by Maduro as his latest weapon in the “economic war”.
"This is going to allow us to move forward to new ways of international financing for the country's economic and social development," Maduro said.
He continued by arguing the petro will “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade”.
The announcement has already spurred a wave of public debate over whether or not Maduro’s Petro crypto-currency can achieve the stated goal of circumventing the “economic war”.
Of course, this entire discussion is a waste of time for three very obvious reasons.
#1. No Details
The first reason comes down to the simple fact that Maduro has presented no actual details of how his Petro will work. Beyond suggesting the crypto-currency will be backed by Venezuela’s oil reserves, he’s given us nothing to work with. How will it be purchased? Where will it be traded? Will the government set its price, or will it float? How will it be secure? Who will accept it? How will it be promoted? What will it even look like?
These are very basic questions, none of which Maduro has answered yet. Until he does, any conversation about the petro is purely speculative. Maybe he’ll do so later, but at this point it’s a discussion that’s simply not worth having.
#2. It’s an Impossible Task
But hey, since everyone else is speculating, I might as well throw my hat into the ring. On a very basic level, the entire idea of the Petro is pretty implausible. To be worthwhile, it would have to succeed where the BsF has failed; that means functioning as a stable medium for exchange. Right now the BsF is plagued by a myriad of problems, but the general issue is that people simply don’t have faith in it. After all, pretty much all currency problems come down to a basic problem of faith. If you can convince people your currency has value, then it has value. One good way to make this happen is with reasonable monetary policy. On the other hand, if you do things that make people lose confidence in your currency, then you’re in big trouble. We’ve known this since Roman times.
Rightly or wrongly, international markets and financial institutions do not trust Maduro, his government, his central bank or his country’s economy when it comes to saving the BsF. Fun fact: they also generally don’t trust crypto-currencies all that much, either. So in effect, Maduro is suggesting taking two things people don’t trust, and hoping they can create something trustworthy. On a very fundamental level, this just seems totally unworkable.
#3 Can’t You See the Patten Here?
Luckily, Maduro’s crypto-currency will either never happen, or it'll materialise only to serve as a further (though hopefully short-lived) waste of time. I know this because we’ve been down this road so many times already. Since coming to power in 2013, Maduro has settled into a predictable pattern: a couple of times a year, he makes some bold new announcement on currency reform. By my count, this is at least the seventh such announcement. Nowadays, they tend to happen every six months or so, with some exceptions here and there.
Indeed, almost exactly six months ago, I was writing an article on a previous, apparently big currency announcement. Back then, I was looking at the then-freshly publicised overhaul of the Dicom exchange tier. At the time, I complained of a lack of details in the proposal, before arguing the initiative would probably fail to achieve its stated goal of closing the gap between official forex tiers and the burgeoning black market. I then made a prediction:
“Overall, if the new Dicom system follows the pattern established by previous rounds of reform, then we should see a familiar story unfold: things will hold together for the first few months, with perhaps a few successful rounds of auctions. The government will declare victory. Then, a few months in, the new system will be quietly shuffled out of the limelight, as the exchange rate once again detaches from reality and the cash dries up. Then, we’ll see a new round of reforms next year.”
So how did my prediction hold up? Well, after some initial fanfare from state media, the new and improved Dicom slowly faded into obscurity a while ago. Today, the Dicom rate is BsF11,300 to the dollar, while the black market rate is more than BsF92,000. So much for closing the gap, eh? Then in September, we saw Maduro introduce another tweak to Dicom; again, with no real impact on the BsF’s slide into oblivion.
Now, with Dicom being quietly pushed into the corner, Maduro has started the cycle again with another big, bold announcement that will, in all likelihood, probably suffer the same fate.
Gazing into the Crystal Ball
On that note, I’m going to make another prediction. Call me pessimistic, but I’m going to predict the Petro will never get off the ground, at least not in a meaningful sense. If it actually launches at all (which is unfortunately totally possible), it’ll be accompanied by a few weeks or even months of cheer-leading from the government. At first, it might even look a bit successful, but don’t be deceived. Give it six months to a year, and it’ll become abundantly clear that the Petro was always doomed to be yet another impulsive, half-baked policy proposal from a government that has effectively surrendered its currency. Just like Dicom, the Petro will later be ushered out of the limelight, and Maduro will proclaim some other terrible idea.
I know this because it’s already happened so many times now, with each grim chapter unfolding with a bitter predictability that’s become too obvious to ignore. Eventually, I hope I’ll be proven wrong, and Maduro will start take measures that go to the heart of Venezuela's currency disaster. The problem, however, is that after so many years of neglect there’s just no easy way out. If Maduro does eventually choose to genuinely act, it’s going to be pure agony for the Venezuelan people. At this point, it’s so much easier to just keep stringing voters on with false hopes and headline-grabbing, flash-in-the-pan initiatives. Hence, why we’re having this discussion on the eve of another election, and why this entire controversy will, most likely, prove to be one more waste of time.