While investors are musing about the final form the US tax changes and the Brexit negotiations, cyber-currency interest has been bolstered by Venezuela’s announcement over the weekend. President Maduro said that Venezuela would issue a digital currency. It could be the first sovereign to do so, which would seem to undermine the decentralized nature of crypto-currencies.  

Maduro did not provide details, except to endorse the blockchain methodology and indicate that the new currency (“petro”) would be backed by the country’s oil, gas, gold, and diamond reserves. The digital nature of it may be noteworthy, but being backed by a basket of commodities is what some economists have advocated providing an intrinsic value and anchor to what is now a universe of fiat currencies.  

The declared purpose of Maduro in proposing a cyber currency is to circumvent the embargo imposed by the US and the EU. Obama first imposed sanctions on Venezuela in 2015, and the Trump Administration ratcheted them up and took another step a month ago to widen the embargo. Last month, the EU imposed its own sanctions. It agreed on a range of actions, including banning arms sales, imposing travel restrictions on some Venezuelan officials and set up a system for freezing assets. This aggravates the economic challenges the government already faced.  

While the bolivar is officially pegged to the dollar, its unofficial price is more important. It began this year around 3000 per dollar, and now reports suggest that there may be more 100,000 per dollar. The implications for inflation, growth, servicing foreign debt, and social cohesion are obvious. 

Yet we are skeptical that a cyber-currency will resolve any of Venezuela’s serious problems, even if it were to be launched. Reports suggest that a full third of Venezuelan’s have internet access. Recently, it appears that some Venezuelans may have moved out of the bolivar, but rather than buy dollars, they bought existing cyber-currencies. Rather than arrest the capital flight fleeing the increasingly isolated country that is experiencing hyperinflation despite the rise of its oil, of which it has the most reserves in Latin America. The Venezuelan demand for cyber currencies was also to circumvent the country’s capital controls.