No other country today could state a more depressing economic case than Venezuela.
Earlier this week, the International Monetary Fund (IMF) stated that the Venezuelan economy will be reaching a 1,000,000 percent inflation this year. Yes, that’s six zeroes.
Consequently, Venezuelan President Nicolas Maduro announced on July 25 the “solution” to the country’s nightmarish hyperinflation —the creation of another fiat currency, Bolivar Soberano, to replace the former. According to him, the country will be removing five zeros from its currency, which might lead to an economic reset. Might.
Many are criticizing the move, implying that it is a mere band-aid solution to a festering wound. One article from the Washington Post even went as far as calling it a “quack remedy.”
Is there any other way to curb Venezuela’s hyperinflation?
While others believe that the country’s economy is at a point of no return, many more are offering sound solutions to the deepening crisis, believing that it can bounce back from its miry condition. Germany, for instance, experienced a hyperinflation in the 1920s as an aftermath of its defeat in the World War I.
One article in Fortune cited four mutually-inclusive solutions: make living affordable, stabilize the currency, eliminate dysfunctional price controls, and adjust to lower international oil prices. The article considers the solutions feasible, claiming that “the Venezuelan government has shown that it has administrative capacity when it really wants to use it.”
However, President Maduro’s policy doesn’t seem to incline with the conventional propositions. Instead, he is leaning toward the use of government-backed cryptocurrency Petro, which has even more critics. Petro has very few buyers, if any, and there were seen numerous red flags of corruption in the creation.
Maduro’s solution won’t really solve the issue, but it’s not only because of his failure to remedy the problem in the way that the world expects; a number of individuals are claiming that the problem lies with the concept of money itself and that Venezuela’s case is merely a blown-up crisis that many others are prone to experiencing.
James Zdralek, a senior user experience specialist at SAP, published a whitepaper named The Future is Money, introducing incredible solutions to inflation and security, mainly through the “futures-backed currency.”
According to the paper, a futures-backed currency is a type of money “operating as an ecosystem of prepaid forward contracts that can be exchanged on a blockchain infrastructure in both individual units and managed funds.”
In a nutshell, Zdralek’s proposition is a total revolution wherein a futures-backed currency’s worth would be based on pre-agreed deliveries of products and services instead of gold and worse, on mere “trust” in a government’s economic performance, as is the case with fiat money.
Zdralek explained in a blog:
“It can be argued that a currency backed by the future delivery of a product or service is better currency than traditional money such as the Euro, new digital money such as Bitcoin, and even gold-asset backed digital currencies such as Digix. One of the improvements of futures-backed currency is that control of the economy is removed from banks and government. Interest, inflation, and economic growth return to their natural functions, separated from government finances and international banking.”
In an interview with Forbes in November 2017, he said that the idea is not exclusively his’—others have thought of similar concepts. However, the only thing that makes the revolution feasible today is the dawning of blockchain technology, which provides a way for people to be accountable to one another in exchanges of value, all the while eliminating the need for intermediaries that require trust. And with smart contracts, agreements are written in code, which people can literally trust to be way more than gold.
Disillusionment With Fiat
Earlier this month, Business Insider sat with Jeffrey Wernick in an interview. Wernick holds a reputation for being an investment visionary—he invested in Uber and Airbnb before they went mainstream, and bought his share of Bitcoins in the very first year it was made available to the public. One can only imagine how much profit he gained from his fateful purchase of Bitcoin, which amounted to virtually nothing in 2009.
But even more interesting is his disillusionment with fiat money. In his teenage years, he witnessed how then-President Richard Nixon suspended the convertibility of gold into US dollars. Many countries followed suit, with every central bank printing money just because it believed it can, and that the people would put their trust in the government.
Wernick foresaw that creating a currency pegged on virtually nothing but trust in a government’s economic performance “would cause a debasement of our currency, where we’d have high inflation.”
Also, some economic experts are predicting a possible market crash, which may be sooner than later. According to Francesco Filia, chief executive at Fasanara Capital, “the signposts of a potential market crash are coming in with increasing hubris.”
Resounding Yes To Blockchain
Maduro’s solution won’t really solve the issue. Also, the conventional solutions offered by many well-meaning economists will be difficult to implement at best, and if it does, one can only guess how many years it would take.
For Venezuela to wake up from its nightmare, it will need to take radical measures, and it’s not war or anarchy. It can perhaps take its Petro scheme two notches higher, and explore deeper into futures-backed currencies.
Many political powers like the US and China maintain a peculiar relationship with blockchain technology; they say no to cryptocurrencies, but yes to blockchain, and rightly so, since many economic giants are beginning to revolutionize their systems through the said technology, which has been one of the most welcome disruptors so far.
Many crypto critics acknowledge the innovative properties of cryptocurrencies even though they continue to shy away, arguing that cryptocurrencies are still premature —they are what Myspace is to Facebook.
Venezuela is in a most uncomfortable and desperate situation right now. Yet the country could still take the opportunity to reinvent the way things are done in a conventional society.
If President Maduro intends to remain stubborn in his economic policy, then maybe he can make good use of blockchain technology to create a new financial system, which might not only free the country from its shackles of hyperinflation, but set a new standard for other countries to look up to. As Simon Bolivar, South America’s El Libertador once said, “the art of victory is learned in defeat.”
May Venezuela gain the tools to help it attain its much-needed victory through this defeat.