The Venezuelan bolivar is broken.
While bitcoin and other cryptocurrencies have dropped tremendously from their all-time highs of late last year, Reuters has reported that the bolivar has lost 98 percent of its value over the past year. Some Venezuelans are now using bitcoin as a way to opt out of their national financial system, which has turned the South American country into basically an experiment on the usefulness of bitcoin in times of economic turmoil.
On the most recent episode of The Coin Pod, host Zack Voell spoke with Venezuelan product designer Alejandro Machado regarding the state of bitcoin in Venezuela. During the conversation, Machado discussed the use of LocalBitcoins as a way to pay merchants, the use of a bitcoin as essentially an offshore bank account, and the overall level of bitcoin adoption in the country.
Using LocalBitcoins as a Bank Account
While it may be possible to store some bitcoin on a smartphone or laptop in Venezuela, finding a merchant who accepts the cryptocurrency is a different matter. Therefore, a bitcoin user must be able to switch from bitcoin to bolivars in a matter of minutes whenever they want to make a purchase out in the real world.
“If you can find a way to have an income in bitcoin or foreign currency, you want to hold that other currency that’s not the bolivar for as long as you can and only make payments in bolivars when you absolutely must,” said Machado.
LTB Network correspondent Christian Garcia shared his method of effectively paying merchants via Bitcoin on an episode of Let’s Talk Bitcoin back in May. According to Garcia, merchants often provide their bank account details to customers when a sale is made because bank to bank transfers in Venezuela are instant when both parties use the same bank.
Knowing this, Garcia decided to hold some bitcoin in his LocalBitcoins account and sell some in exchange for a bank transfer directly to a merchant as a way to quickly move between bitcoin and bolivars. With this setup, Garcia avoids the devaluation of his savings through inflation, as bolivars are only used as a medium of exchange.
In this way, LocalBitcoins acts as a sort of bank account for Garcia, and the people he sells his bitcoin to on the platform are able to make payments to merchants on his behalf.
Bitcoin as an Offshore Bank Account
It should be noted that inflation is not a new problem in Venezuela. During his interview on The Coin Pod, Machado noted that thirty to forty percent inflation per year was viewed as normal in the past. Because of this reality, many Venezuelans, including Machado’s father, would try to convert their paychecks to other currencies and store them in offshore bank accounts.
“A lot of what we did, even before bitcoin was around, was we tried to hold our savings in dollars,” said Machado.
With bitcoin, Machado pointed out, anyone can gain access to what amounts to an offshore bank account with nothing more than an internet-connected device. Those who are able to store their money outside of Venezuela’s financial system will be able to better preserve their wealth and enjoy a higher quality of life.
It’s also possible that bitcoin could simply be a way of converting bolivars to more stable currencies such as the US dollar. When asked about this point specifically, Machado told CryptoInsider, “Yes, it can also be used as a way to transfer money out. Obviously, most people would prefer a [currency] with lower volatility.”
Machado pointed to AirTM as a service that provides virtual dollar accounts to around 200,000 Venezuelans, as long as they’re able to fulfill some basic Know-Your-Customer (KYC) requirements.
Abra is another service that allows Venezuelans to gain exposure to the US dollar (and many other fiat currencies), albeit through the use of Bitcoin and Litecoin-based smart contracts. With this app, there are no KYC requirements, as the smart contracts tied to the value of fiat currencies are held directly on the user’s phone. Machado finds it to be a “super interesting” option.
Having said that, a serious limitation of Abra in Venezuela right now is that deposits can only be made via bitcoin or litecoin.
Still a Niche Activity
While the adoption of bitcoin in Venezuela has been touted in the media many times, Machado told Voell it’s “still a very niche activity” during his recent interview. One main reason that bitcoin hasn’t taken over the country with the worst currency in the world is that, in the grand scheme of things, cryptocurrency is still very much a new idea.
“You just need to have some level of technical sophistication, which is not a trivial problem to solve,” said Machado. “The digital divide is real. It’s a lot harder than you’d think to get people with very low education levels to be confident enough in using these systems. We’re talking about money, and people are generally not trusting of just numbers on a screen that could mean anything.”
Additionally, the Venezuelan government is not interested in allowing their citizens avoid economic restrictions. Machado pointed to the banning of AirTM and reports that users of LocalBitcoins will have their bank accounts examined as two examples of this point.
Having said that, it’s likely that more restrictions on bitcoin would simply push the activity further underground. Bitcoin hasn’t been enough of an issue to clamp down on too hard up to this point, but that could change as the inflation rate continues to spiral out of control.
Picture from Wikimedia Commons.
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Kyle first used Bitcoin in 2011. By early 2014, researching and writing about Bitcoin had become his full-time occupation. Currently, he contributes regularly to Forbes and CoinJournal. His work has also appeared in Business Insider, VICE Motherboard, Nasdaq, and many other media outlets. Additionally, he provides a daily Bitcoin news recap via a newsletter and YouTube show (audio only version available via SoundCloud), which can be found at kyletorpey.com.