Redefinitions of Currency 2: Crypto Venezuela

Venezuela: then and now. Image Source: Total Crypto.

To paraphrase Chris Dixon, technology has changed the underlying drivers of wealth; once, wealth was determined by commodities; then it was decided by politics; and now, wealth is based on mathematics. There is no better indicator of that shift than in Venezuela.

Fiat collapse: Venezuela's currency crisis (20 August 2018). Video Source: Youtube.

Return to the world's oldest economy: Venezuela's economic crisis fuels sex trade (23 August 2018). Video Source: Youtube.

Venezuela: New currency fails to curb hyperinflation | Al Jazeera English (22 August 2018). Video Source: Youtube.

Venezuela is currently Ground Zero for bad news. In one month, the president, Nicolás Maduro, dodged a historic first drone assassination attempt on a world leader. The country survived a 7.3 magnitude earthquake. Millions of Venezuelans are migrating to neighbouring countries, which are becoming less and less welcoming.

The hacktivist group Anonymous dismissed the Maduro assassination attempt as a government hoax, perhaps similar to a recent incident in Zimbabwe; note the discrepancy in footage that showed - and did not show - Maduro's wife, Cilia Flores, from two different cameras. Note also that the source of the differing footage is the Russian network RT (Ruptly) and these could be two separate occasions. Otherwise, this means that there were two versions of the footage of the attack, which were filmed separately. Anonymous - LA VERDAD sobre supuesto atentado contra Nicolás Maduro 2018 [Anonymous - THE TRUTH about alleged attack against Nicolás Maduro 2018] (5 August 2018). Video Source: Youtube.

Maduro's popularity is in the toilet; back-chamber rumours are circulating that he knows secrets about Hugo Chávez's death, that he is in league with the devil, and that he is not a true Venezuelan, but perhaps was born in Colombia, and in any event - it is whispered - he will die soon, though not by assassination. Other rumours are circulating the president tried to escape Venezuela in secret on 26 August 2018, knowing that the situation is irreparable. The cult of personality may not provide a suitable replacement, since alternatives to Maduro, like María Gabriela Chávez, are not popular either.

Human Rights Watch: Venezuela: Video Footage Exposes Brutality of Repression (21 July 2017). Video Source: Youtube.

Human Rights Watch: Venezuela: Systematic Abuse of Opponents (28 November 2017). Video Source: Youtube.

If you've ever lived in an unstable country with a crippled economy, decentralized cryptocurrencies which are disconnected from state policies start to look really good. Goldman Sachs confirms cryptocurrencies' utility in failing economies, though they are loath to admit the same utility in seemingly healthy economies. From Bloomberg on 10 January 2018:

"'In recent decades the U.S. dollar has served its purpose relatively well,' Goldman Sachs strategists Zach Pandl and Charles Himmelberg wrote in a report Wednesday [10 January 2018]. But 'in those countries and corners of the financial system where the traditional services of money are inadequately supplied, Bitcoin (and cryptocurrencies more generally) may offer viable alternatives.'"

On 15 February 2018, Goldman employee and software developer Jonathan Wheeler quit his job and took to social media to explain why. Wheeler - borrowing an idea from Coinbase CEO Brian Armstrong - declared he is going to solve Venezuela's hyperinflation by leveraging Bitcoin.

With the help of the beta-stage Lightning Network, a protocol meant to solve Bitcoin's speed problems and high miner fees, Wheeler declared that this is "Bitcoin's mainstream moment." He is planning a gigantic airdrop to transfer Bitcoins to thousands of Venezuelans:

"We intend to raise at least $300 million worth of real hard-earned Bitcoin capital, and electronically airdrop a large portion of it onto Venezuelans. Unfortunately, in order to avoid tipping our hand as we plan and prepare, we wish to keep the exact method(s) a secret. All that I’ll reveal is that our tactical plan is a practical and scalable approach. You just have to think big.

Over the last couple of weeks, my team and I have spoken to a prominent billionaire, a human rights foundation, an ambassador to the UN, many Venezuelans, journalists, Bitcoin engineers, VCs, and others. All have expressed excitement and an eagerness to help, and we’re connecting with yet more prominent people. It’s very inspiring. ...

Every Bitcoiner I’ve spoken to has indicated that they would be happy to donate 1% of their holdings for the cause, knowing that if the mission is successful, that this will likely increase the value of the remaining 99% of their holdings, due to a massive uptick in real-world utility and attention, and thus demand. ...

If we successfully pull off this mission, it has the potential to become one of the greatest socioeconomic experiments in the history of the world, and I don’t think that’s hyperbole. It would be like witnessing the first atomic bomb go off: The world would suddenly realize that Bitcoin isn’t theory anymore… it’s practice, and it’s real."

Not so fast, Jonathan. Maduro has pegged his country's failing currency, the bolivar, to cryptos called the Petro and the Petro Gold, which are supposedly backed by 5 billion barrels of Venezuelan oil reserves, as well as gold, gas, and diamonds. The government crypto, which launched on 20 February 2018, was reported to be sitting on the Ethereum blockchain. However, it is on the NEM blockchain. NEM's foundation faced criticism from community members for permitting Maduro to access their chain. The devs' response was that NEM is open to everybody.

The NEM technology is freely open to any individual or organization that wants to use it. The NEM Foundation abstains from political endorsements. We can confirm that the Venezuela Government is intending to use the NEM Blockchain. https://t.co/Ntl9qIIBCb

— NEM (@NEMofficial) February 21, 2018

To raise international funds for the government, 38.4 out of a total 100 million Petros were pre-mined and sold to government cronies in a pre-sale at a 60 per cent discount in February and March of this year. Investors bought the Petro in exchange for Russian rubles, Bitcoin, NEM, and Ethereum. A second (unsuccessful) Initial Coin Offering (ICO) sale to the public offered 44.4 million Petros in exchange for foreign currencies. 17.6 million Petros are reserved for the government cryptocurrency entity (SUPCACVEN). Eventually, the Petro will be offered in exchange for the bolivar.

Venezuelans flock to banks, ATMs after launch of new currency (26 August 2018). Video Source: Youtube.

Or rather, in exchange for the 'sovereign bolivar': on 20 August 2018, the president tried to combat hyperinflation by removing 5 zeroes from the bolivar and renaming it; it only created confusion among consumers. On 18 August 2018, Maduro announced that the state would allow the Petro to fluctuate, pegged to the cost of a barrel of Venezuelan crude.

In July 2017, the Venezuelan oil basket price was roughly USD $42. Oil production in Venezuela has collapsed. In June 2018, Venezuela only produced 1.34 million barrels of oil per day, the country's lowest production rate in seventy years.

After government intimidation, private sector oil companies began pulling out of the country and refused to operate there. As a result, the country is not delivering on its obligations to customers from China, India, Japan and the US:

"Reuters reported that there are more than 70 tankers sitting off the Venezuelan coast. ... In April [2018], Venezuela only shipped 1.49 million barrels per day of oil and fuels, or 665,000 bpd below what it had contracted, according to Reuters. That means that some customers are missing out on cargo. For instance, in April, PDVSA shorted its subsidiary Citgo nearly all of what it had promised – 273,000 bpd.

It seems unlikely that the sudden decline in exports will be resolved in any reasonable timeframe. It isn’t just a matter of easing bottlenecks at the ports. For one, it isn’t clear that PDVSA can handle the necessary volumes from its existing export terminals.

More importantly, upstream oil production continues to plummet, and refining and processing are also in freefall. Venezuela’s heavy oil needs to be upgraded before it can be exported, but at least three PDVSA upgraders are in terrible shape, and the Petropiar upgrader, which PDVSA runs jointly with Chevron, is offline for maintenance."

Maduro's government is considering using 'force majeure' to get out of its contractual obligations. Before Maduro can do that, his oil customers are simply looking elsewhere, mainly to Canada and Mexico. The president desperately signed a gas deal with Trinidad and Tobago on 25 August 2018.

China has loaned Venezuela over USD $50 billion to prop up its oil production. In July 2018, the Chinese directly invested USD $250 million in the Orinoco Belt. The Chinese are considering investing a further USD $5 billion to recoup some of their earlier loans and losses in Venezuela. None of this seems to be helping, due to the country's catastrophically bad management.

Donald Trump has decided not to add to existing US sanctions by sanctioning Venezuela's petroleum products. From oilprice.com:

"The word out of Washington is that the United States is no longer looking at sanctioning Venezuela’s oil industry, and not just because Venezuelan oil accounts for a large part of the imports of the refiners on the Gulf Coast. The U.S. Administration doesn’t want to be responsible for the total collapse of Venezuela, and doesn’t want to be blamed for contributing to it, analysts told Platts’s Brian Scheid.

'If you break it, you buy it,' George David Banks, a former international energy and environment adviser to U.S. President Donald Trump, told Platts. 'The White House doesn’t want to own this crisis.'"

The US Treasury warned US citizens not to invest in the Petro cryptocurrency. On 19 March 2018, President Trump explicitly prohibited Americans from buying Petros.

While the mainstream media are puzzled by, and skeptical of, Maduro's move to create a cryptocurrency pegged to an increasingly-rare barrel of Venezuelan crude, Bitcoin observers dismissed the Petro as a total scam. Tone Vays: "It's just another gimmick to somehow ... hold off a revolution another week." The Petro is not a real cryptocurrency; it's not proof of work, or a blockchain being mined. It's not being traded on crypto exchanges. The Petro is the first "legit state shitcoin ... done by a dictator." Wyz Borrero dismissed the Petro as a true cryptocurrency, here:

"The whitepaper describes Petro as having an initial issue of one hundred million, of which there will not be additional issues. In layman’s terms this means they printed their own money, there is no work, no mining, no rewards, this is just a smart contract on the NEM platform that issued 100,000,000 tokens out of thin air. It was originally supposed to launch on the Ethereum platform but was later changed citing higher fees and slower transactions as a motive, but we can suspect there is missing data and that’s not the whole story. I highly doubt the Ethereum Foundation or Vitalik [Buterin] giving the go [ahead] to having the platform tied to an authoritarian government like Venezuela, who has quite a few human right violation cases going on. ...

As beautiful as a libertarian/leftist dream [the] Petro sounds in paper, it is nothing like it. It is an authoritarian-government issued, centralised, premined SHITCOIN whose only purpose of existence is to take what little money is left from the citizens, to the hands of government and corrupt government officials. Also it is the only way they can get around international sanctions and bans. "

Tone Vays and friends: Bitcoin commentators dismissed Venezuela's Petro. Bitcoin Brief - Venezuela's Petro, Mining Energy, ETF Rejection and Short-Squeeze via Bitmex (23 August 2018). Video Source: Youtube.

As for adoption of the Petro or other cryptocurrencies, commenters on Quora felt the average Venezuelan knows nothing about computers or Bitcoin:

"See, in Venezuela ... it's not normal yet for everyone to have a computer in their household. We're stuck in time. Most people can't even type a paragraph correctly in Microsoft Word, let alone figure out how to get Bitcoins or use them. Venezuelans make like $20 a month, so I know of many people who seek to do jobs online, everything from web page design to translation, just so they can get paid in dollars, even if 10 times less than what the actual job is worth. After all, making 20 bucks in two days of work is pretty darn good. Similarly, I could see some techy guys doing something similar with Bitcoins. But to conclude, no. The general population doesn't even have the tools, both material and intel[l]ectual, to use Bitcoin."

While a 2017 study from tendencias digitales found that this opinion is largely true, Venezuela's middle classes have caught on quickly. Maduro's administration, eager to promote the Petro, has declared competing cryptos to be illegal. The government particularly views Bitcoin as the "currency of criminals." Two Venezuelans were arrested for mining Bitcoins in 2016 and arrests of big and small mining operators continued through 2017. The country has become one of the most dangerous places in the world to mine Bitcoin, but people do it anyway, partly because government-subsidized electricity in the socialist country is so cheap:

"'Antminer S9s are the most popular computer used to mine bitcoin in Venezuela. They cost about $3,000 each (plus shipping) and usually come from China by way of a covert middle country. ...

'Having three S9 miners is about 30 cents a month to pay for electricity. Three devices would be one bitcoin-ish in 10 months.' The beginning price for mining has made it an effective way to supplement income, with two to three devices per household, though many have scaled their operations to the point where they are able to independently support themselves.

'There must be tens of thousands of people mining in Venezuela,' said Randy Brito, founder of the non-profit website BitcoinVenezuela.com. ...

Most of the big mining farms with thousands of ASICs or rigs are run by people close to the government, those that are not and are caught with several devices, end up being raided and the devices subtracted. Regular people buy the devices with foreign currency they have saved or they acquire in the free (black) market, or buy them from others that import them using bolivars inside the country."

This is the great irony in a country where a socialist administration seeks to control the economy. The attempt to hyper-regulate gives rise to unmanageable economies. Black markets. Cryptocurrencies. The peer-to-peer exchange site Local Bitcoins reveals a brisk Venezuelan trade in Bitcoins. The Bitcoin Venezuela Facebook page, run remotely from Spain, has over 11,000 users. Bloomberg warned on 24 August 2018: "Socialists of the world, be careful."

The takeaway: for every action, there is an equal and opposite reaction. Venezuela is teaching a lesson in mainstream cryptocurrency adoption that goes beyond utility.

Different commentators are analyzing the larger meaning of cryptocurrency innovation. They might speak about it as a political problem, as in how one may reconcile libertarianism and cryptoanarchy via different understandings of property and freedom. You can see Vinay Gupta trying to crack that nut here. Purists like Chris Dixon might speak of the power of mathematics. It's hard to argue with the underlying numbers of the universe.

When considering the potentials of smart contracts pioneered by Ethereum and promised by EOS, remember that cryptos represent a different way of living. They are not just virtual money. They do not just constitute citizens' refusal to include banks and the state in economic transactions. This crisis raises the question of how much Venezuelans are willing to change their society and their way of life with this technology.

Both technically and in terms of how they are pegged to social media - that is Internet communications, interactivity, connectivity, memes, and virality - cryptos build virtual communities. Instead of a gold standard, or a petroleum standard, or a political standard, we see cryprocurrencies are based on a social media standard. The new currencies are based on how people behave in relation to technology, and they reflect the value of innovation in terms of how the virtual becomes real.

A screenshot shows the jump in trade in Bitcoins to the bolivar on the site, Local Bitcoins, up to May 2018. Click to enlarge. Image Source: Local Bitcoins via Crowdfund Insider.

There are glimpses of what this means in Venezuela. A failed state is a failed community. Citizens form new communities, connecting to other individuals online. If your government destroys your life and fellow-citizens cannot help you, if you are separated from your friends and family, if you are operating in an atomized society, if your identity is compromised or erased, an anonymous stranger on the other side of the world will help you.

In a hyper-controlled environment, chaos and freedom become stabilizing factors. A CNBC report confirms that a lot of Venezuelans have been secretly mining Bitcoin to survive, although they risk jail time for it: "For me, bitcoin has represented the ability to be able to support and feed my daughter in a very volatile environment."

On 5th July, Reddit user 'Héctor' aka 'Windows7733' posted a photo of food and essentials he bought in Venezuela with anonymous donations of the cryptocurrency Nano, sent to him by other Redditors. Image Source: imgur.

Venezuelans are also mining Ethereum: "You can feed a family with one ether rig. It's a fact." Miners buy goods at the crypto marketplace, purse.io, and have them couriered to Caracas from Miami. A crowdfund sent the cryptocurrency Nano to a needy man in Venezuela. On 6 July 2018, Bitcoin Magazine reported:

“0.5 nano is almost one entire monthly salary in my country. It's more than I made last month,” he wrote in a post celebrating his newfound wealth on the r/nanocurrency subreddit.

Fast forward a few days to July 5. After a round of direct messages and a post update to list his Nano wallet address, Héctor had amassed 360.68 nano (nearly $950). With these funds, Héctor was able to purchase some 224 lbs. of food for 29 nano, according to an update he shared with the nano community in a new Reddit post.

One cryptocurrency which is aggressively pushing mass adoption in Venezuela is Dash. Dash's devs cleverly promote the social aspect of cryptos. The Dash Core Group wants to bring that potential to a country which is falling apart, where Dash meet-ups emotionally and economically help demoralized citizens whose families are being torn apart by escalating crises.

Dash adoption is rising in Venezuela. Images Source: Dash Core Group via Business Insider.

Dash promo: Documentary - Venezuela and the Cryptocurrency Revolution - Power by Dash Digital Cash (31 July 2018). Video Source: Youtube. The same video in Spanish is here.

Dash promo: Venezuela and the Cryptocurrency Revolution - Interview with Dash Lead in Venezuela Eugenia Alcalá (29 June 2018). Video Source: Youtube.

Dash claims that retailers are signing up to accept Dash at the rate of 200 per month. (For its part, Coindesk was skeptical about Dash's progress.) Dash promoters have also set their sights on other countries with high inflation: Turkey, Ukraine, and Argentina. It's odd that the government is permitting Dash marketing, while Bitcoin is illegal. One may wonder at the deal the coin's devs struck with the Maduro régime.

On 21 January 2018, Maduro's administration set up a registry requiring people to declare their crypto mining, whereupon it promised to issue permits for citizens to mine top cryptocurrencies. But by the end of May, the government halted all imports of mining equipment.

You don't need a mining rig or an airdrop to see that Maduro's troubles are a sign of things to come. In an unstable, mobile, connected world, imagine what it would mean to have your identity, your worldly wealth, and your international papers and credentials secured on your mobile phone. And if you lost your phone - or never had one - secured by a single password, fingerprint or retinal scan. Again, it's not just a pragmatic change. It signifies a new way of life. The implications of this possibility will be the subject of future posts.

See all my posts on the Redefinition of Currency.