Venezuela: using stablecoins to fight hyperinflation
Another experiment in real-life use of crypto
A few weeks ago, El Salvador’s Bitcoin Law came into effect and the world has been keeping tabs on the situation. There has been ample coverage of both the protest against president Bukele’s government in general and Bitcoin in particular, while there have also been reports of the cryptocurrency’s successful adoption by some of the population. But let’s take a step back to look at the reasons that prompted the law in the first place: First, decades worth of wrong monetary policy that led to the elimination of Salvadoran national currency in favor of the adoption of the US dollar. Second, an ever-increasing dependency on remittances as a major source of national income and, finally, losing significant amounts of money in transaction fees to get those remittances into the country. But there’s another country in Latin America with a similar situation, and where blockchain-based currencies are having a more discreet, yet no less significant effect on the local economy. My own native country: Venezuela.
How are Venezuela and El Salvador alike? (And how are they different)
Venezuelan monetary policy hasn’t been able to maintain stability of the country’s national currency. While the Bolívar is still in circulation (unlike the Salvadoran Colón), most people and businesses would rather not receive it. Because the Bolívar loses value so quickly, it’s common practice to announce prices for goods and services in US dollars. Those who have them can pay directly in USD. Those who don’t can pay in Bolívares at the current exchange rate, which changes a couple of times each day. So the Bolívar is still officially in use and the US dollar hasn’t been officially adopted, but the day-to-day reality is that the latter is displacing the former.
The big social and economic crisis that Venezuela has been going through over the past couple of decades has led to many people fleeing the country seeking better opportunities elsewhere. Its been estimated that over six million Venezuelans have left the country, most of them during the last five years. Those who find steady work send remittances to family members that are still living in the country and those funds are crucial to survival for many families. Currently a tenured university professor makes about 20 USD a month, so people have to either become remote workers for foreign companies or depend on funds sent from abroad.
Those previous points are similar to the situation in El Salvador. But there is one thing that makes Venezuela’s crisis worse: hyperinflation. Venezuela has been at the top of the list of countries with the highest inflation for several years now. Annual inflation for 2020 was just over 2,700%. For comparison, El Salvador’s inflation for 2020 was 4.3%. The Bolívar loses value so quickly that the government has “reconverted” the currency three times, slashing off zeroes. With the latest reconversion, which will take effect on October 1st 2021, a total of 14 zeroes will have been removed from the currency. On that date, 1 USD might be worth about 4.5 “Bolívares Digitales”. But that’s just an easier way of saying that one dollar will be worth 450,000,000,000,000 original Bolívares.
During times of hyperinflation, one of the people’s defenses against that rapidly diminishing value of their currency is to exchange it for a more stable currency (like the Euro or US Dollar) or commodity (like gold) as soon as possible. But this isn’t always easy to do. Gold isn’t something you can buy around the corner. And dollar bills can be very scarce, especially the lower denominations. At this time, 20, 50 and 100 dollar bills are relatively common in Venezuela, while 10, 5 and 1 dollar bills are extremely difficult to find. So workers who receive payments of 10-15 USD will be very hard-pressed to convert their money into something more stable. Or, rather, that was the case until stablecoins came into the scene.
Cryptocurrency’s status in Venezuela
Generally speaking, Venezuela is a crypto-friendly country, with laws expressly allowing buying, selling, trading and mining crypto tokens, as long as miners register in the government’s National Cryptocurrency Superintendency (SUNACRIP). The government even created its own cryptocurrency, the Petro (PTR), which is not a CBDC. The Petro, however, hasn’t gained much acceptance either within the country or outside. It’s only listed on a handful of small, government-controlled exchanges. Venezuela is among the top countries in cryptocurrency transactions. But, ironically, you would have a very hard time finding a person or business willing to take payments in Bitcoin, Ether or any of the major crypto tokens. It’s perfectly legal for them do so, but don’t. I’ve asked many of these business owners and managers about accepting cryptocurrency payments and they generally tell me they don’t because of one of two main issues: one if them is having bad experiences when receiving payments in Petro and believe that all cryptocurrencies will cause the same issues. The other, more informed owners state that they’re afraid of losing money if crypto prices suddenly crash as they have done before.
There are two things that have started warming businesses in Venezuela to the crypto world. One of them is more people being aware of stablecoins, with the benefits of cryptocurrencies but without the extreme volatility. The other one is Binance’s easy, instant and no-fee payment service, Binance Pay. Businesses suddenly started accepting payments in USDT or USDC through Binance Pay. This started in large cities like Caracas, the country’s capital, but has spread to other cities over the past few months. I was able to buy groceries, paid for with BNB, back in early June.
Most of you reading this are probably used to purchasing cryptocurrencies with your credit cards. Things aren’t that easy in Venezuela. For starters, most Venezuelan credit cards aren’t enabled for internet payments or any transactions outside the country. Second, card limits are ridiculously low as banks haven’t raised them in years. Many cards have been fixed at a 5,000 Bolívar limit for years. At today’s exchange rate, that would be about 0.0013 USD. There’s not much you can do with that. But using the Binance ecosystem, people can buy crypto with local currency on the peer-to-peer marketplace, trade tokens on the exchange and use the Pay platform in businesses that accept it. Or they can sell their crypto back to fiat at the new exchange rate when they need to. This system is very versatile, but what is definitely isn’t is easy. Crypto novices who just want to safeguard the value of their money and make quick payments find Binance way too complicated.
However, other companies are developing other stablecoin-based products aimed at making things easier for their users. Three of them have been quickly gaining traction among Venezuelans: Reserve, Zinli and Valiu. Let’s take a quick look at them:
Out of the three apps we’ll be looking at here, Reserve is the most well-developed and widely-adopted platform. It’s an Android-only (for now) app designed to let users easily buy, sell and make payments in “digital dollars”, which are actually Reserve’s own stablecoin, the RSV token. However, Reserve doesn’t often say that their digital dollar is really a cryptocurrency, probably so as not to scare away people who are afraid of crypto. Similar to the Terra ecosystem of stablecoins, RSV isn’t a central-store backed token, but rather an algorithmic token stabilized by a series of smart contracts tied to the Reserve Rights (RSR) utility token. But most users aren’t aware of the technical aspects of the platform. RSV is listed on several exchanges like Gate.io, Bittrex, Liquid or Uniswap and RSR is listed on Binance, Huobi Global, Bittrex, Bithumb and several others. However, most users buy RSV directly through the app, which uses independent liquidity providers. The app is available to users in Venezuela, Colombia and Argentina and is downloadable for free from the Google Play Store. People can buy RSV with several Venezuelan banks, and also with Argentine and Colombian Pesos, Uphold, Zelle payments, Bitcoin, USDT, USDC, DAI and the recently added tokens from the Axie Infinity NFT game, SLP Ronin and AXS Ronin. Payments between Reserve users are always in RSV and withdrawal options are the same as for deposits, except that you can’t make payments to Zelle accounts but can make ACH transfers to US bank accouunts. Reserve users get both a unique ID they can use to receive payments within the app and also an ERC-20 wallet address that lets them receive RSV tokens from exchanges. The wallet’s interface es very simple, as are all transactions performed with it. Even crypto novices and beginners can be up and running in minutes. People who don’t want to keep their funds in Reserve for extended periods can withdraw to Binance or a personal wallet using USDT on the TRC-20 network with negligible fees. Reserve has been quickly becoming more accepted. In my city there are already grocery stores, bakeries, barber shops, cleaning products stores and even fresh fruit juice stands where you can pay with RSV. Reserve has even started a campaign aimed at asking the UN to declare access to a stable currency a basic human right.
Zinli is a Panamanian e-wallet platform. It’s available as mobile apps for both Android and iOS, all free to download and use. Like Reserve, it offers several options for purchasing digital dollars and users can also receive a virtual debit card for online purchases. The project is catching on, even though there are apparently a few issues. For starters, it’s not clear which stablecoin Zinli is centered on and there have been criticisms on their technical support and issues regarding the debit card. Although Zinli was created to offer a payment platform for unbanked Panamanians, it’s become very popular in Venezuela as well.
The Valiu app, available for Android and iOS, was ceated by a Colombian-Venezuelan startup with the intention of simplifying the sending of remittances between both countries, but has evolved into a popular payment app. It offers several options for quick and easy purchasing of their native stablecoin, the Valiu Dollar (USDv). However, this token doesn’t appear to be listed on any exchange yet. The app is very easy to use for buying USDv, making payments or selling USDv back to fiat currency. It’s become a popular option, especially among those with relatives or friends living in Colombia.
Wrapping it up…
Cryptocurrencies and blockchains have the potential to create a new global economy free from the influence of central banks and traditional financial institutions. There may come a day when you can walk into any store and buy a cup of coffee and pay with WAX, EOS, Ether or any other cryptocurrency. But we’re not there quite yet. If you live in a country with a strong economy and a stable currency, stablecoins are an interesting option. They are easy to buy and use but don’t suffer from the volatility issues that traditional cryptocurrencies have. While several situations in Venezuela have rendered credit cards almost useless, there are ways in which people can purchase cryptocurrencies, including stablecoins, with a lot more ease. While the Binance platform was a great start, these other apps, that specifically incorporate or were even designed with Venezuelan banks in mind, are really helping spread stablecoin use among the masses. The may not be a law officially declaring stablecoins as legal tender in Venezuela, but the current movement, structured from the ground up, is also worthy of keeping an eye on.
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