In Venezuela's Economic Crisis, Bitcoin Is a Lifeline | Opinion

Venezuelans seek refuge in Brazil
Venezuelans load cars with food and other goods before returning to Venezuela on April 6 in Pacaraima, Brazil. According to the U.N. more than 3 million Venezuelans have already left the country because of the... Victor Moriyama/Getty Images

Born in 2008 in response to the global banking and credit crisis, bitcoin has found its "patient zero" a decade later in Venezuela. Faced with hyperinflation, a worthless local currency and a risky black market for dollars, Venezuelans are increasingly turning to bitcoin as a tool for survival in the world's worst-performing economy.

In most countries, bitcoin and other cryptocurrencies still struggle for visibility and operate mainly within niche online circles of tech- or finance-savvy speculators and enthusiasts. But in Venezuela, brick-and-mortar retailers, including restaurants and shoe shops, post signs in their stores inviting customers to actually spend bitcoin and other cryptocurrencies.

As Venezuelans seek to skirt capital controls and a crumbling financial system, it is not difficult to see the appeal of a decentralized digital currency that can function beyond banks and any central authority.

The location app CriptoLugares Venezuela, for example, points users to at least 180 retailers that accept payment in cryptocurrencies. Crypto is also a common payment method on the country's top e-commerce platform, Mercado Libre Venezuela. On social media, freelancers and companies often price their services in crypto.

In the Venezuelan capital, Caracas, big blue billboards have sprung up in recent months along the highways. They promote dash, a lesser-known cryptocurrency boasting only the 15th-largest market capitalization in the space that has fostered a network of merchants accepting the digital asset. Dash's poignant promotion reads, "It is more than money."

The crypto trend in Venezuela is so strong that the government even tried to get in on the act, issuing, with little credibility, the "petro" coin as an alternative to the official currency.

Still, despite the wide embrace, there remain barriers to mainstream crypto adoption in Venezuela. The country may be one of the world's most active markets for peer-to-peer cryptocurrency transactions, according to LocalBitcoins, a popular bitcoin trading platform. But poor internet connectivity amid persistent blackouts and a lack of affordable smartphones can thwart potential participants.

For now, then, the U.S. dollar remains the favored currency. Many Venezuelans trade their Venezuelan bolivars via middlemen and foreign accounts, even though the practice is officially illegal—and not without risk. But Coinbase, the largest U.S. cryptocurrency exchange, hopes to shift the balance. Aiming to donate cryptocurrency to 100,000 Venezuelans over the next year, it has been developing workarounds to the electricity and smartphone problems. "I want to see if we can spark a bunch of uses there and actually have a country in the world tip. In other words, have 50 percent of all transactions in the economy happening in crypto," CEO Brian Armstrong said.

Venezuela, home of the biggest oil reserves in the world and once a regional economic powerhouse, didn't fall into crisis overnight. From my years reporting on Venezuela as Reuters' Caracas bureau chief, I vividly remember the day in 2007 when President Hugo Chávez chopped three zeros off currency bills. A 1,000-bolivar note became a single bolivar—and a sad symbol of the government's hapless policies.

The monetary conversion was intended to psychologically reinforce the local currency's value, which Chávez dubbed—without irony—"strong bolivar." But the result was the opposite, and consumer prices ballooned more than 30 percent to an 11-year high and the top inflation rate in Latin America. Some groceries such as powdered milk, corn flour and toilet paper began periodically disappearing from supermarket shelves.

Those were just early signs of the colossal economic distortion to come. The seeds had been sown around 2003, when Chávez imposed currency controls that gave him the power to arbitrarily fix the bolivar exchange rate, limit Venezuelans' access to foreign currencies and control the prices of dozens of basic goods.

What were supposed to be temporary measures to avoid capital flight in a moment of political and financial turmoil became a hallmark of Chávez's self-styled socialism. Manipulating the local currency in the face of market forces ended up eroding trust in the bolivar. And there lay the foundations of the economic catastrophe and humanitarian emergency that we see today.

While Venezuela was making monetary policy based on zeroes on its currency bills, an anonymous computer coder (or team of coders) published a white paper under the pseudonym Satoshi Nakamoto. It proposed a revolutionary peer-to-peer electronic cash system: bitcoin. Few in Venezuela paid attention at the time. After all, record global oil prices and Chávez's profligate spending created a temporary economic mirage that fueled consumption underpinned by the artificially controlled price of the dollar.

Nowadays, though, with 90 percent of Venezuelans living in poverty, the words of Satoshi Nakamoto resonate more than ever: "The root problem with conventional currency is all the trust that's required to make it work ... but the history of fiat currencies is full of breaches of that trust."

A decade after Chávez lopped three zeros off the currency, the bolivar was subject to another "monetary conversion," touted again as a solution to the country's devaluation pains. Ignoring the past failure, Chávez's heir, Nicolas Maduro, eliminated five zeros from bills. It did not work.The inflation rate has surpassed 1 million percent.

This is why more and more Venezuelans will find their way to cryptocurrencies. In Venezuela, bitcoin is no longer a choice. It is a lifeline.

Saul Hudson is a managing partner of Angle42, an emerging-technology advisory company. He is the former general manager of Reuters America and reported from Venezuela on the economy's decline for more than five years.

The views expressed in this op-ed are the author's own.