Opinion Simon Constable

Venezuela just lurched from the absurd into the insane. While the country suffers the brutal effects of hyperinflation, its socialist president, Nicolas Maduro, just mandated that the country’s banks now must accept a certain type of cryptocurrency.

It’s hard to know how that will help ease its economic crisis.

When Maduro launched Venezuela’s home-grown version of Bitcoin, the Petro, back in February it was hard to see the cryptocurrency as a compelling investment. The Petro is nominally backed by oil, which sort of makes sense because Venezuela has the world’s largest underground reserves of crude oil. However, it wasn’t clear how the link to oil would be maintained.

Earlier this month Maduro said the country’s banks would now have to accept the Petro as a valid currency, according to a recent report via the Coingeek website that covers the cryptocurrency market. The idea behind this presidential order was to help solve the country’s economic disaster. The Coingeek story states:

[T]he move, which was announced early this week, has the specific aim of alleviating the economic crisis which continues to plague the country and which has been going on for several years now.

For those who haven’t been following what amounts to an economic car wreck, Venezuela is now ravaged by hyperinflation which hit an annualized rate of 60,934% on August 27, according to an estimate by Steve Hanke, professor of applied economics at the Johns Hopkins University. He calculates the inflation rate by looking at the costs of goods bought and sold inside the country compares to prices on the global market.

That rate of inflation quickly makes paper money worthless. Money must have three attributes if it is to serve its role: a store of value, unit of account, and medium of exchange. When one of those items disappears then whatever you used to call money isn’t that anymore. In this case, the hyperinflation meant the Venezuelan Bolivar no longer acted as a store of value.

And that, in turn, had a stultifying effect on the economy, which shrank 13.2% last year and 16.5% in 2016, according to data collated by Tradingeconomics.com. The economy will no doubt continue to shrink until the currency problems are fixed.

While the local currency, the Bolivar, is close to useless as money, the idea that the Petro could fill that role might make some sense. Cryptocurrencies usually have a fixed number of units that will be created thus preventing the government from creating more and then perhaps sparking runaway inflation.

However, when the details are considered the idea starts to unravel.

Cryptocurrencies haven’t been a stable store. Consider the most famous one, Bitcoin, which hit a high of more than $19,000 late last year and has subsequently given up more than half that value.

The Petro is an also-ran in Cryptocurrency Land. It was a Johnnie-come-lately to the Cryptocurrency party and so far hasn’t attracted much interest from anyone, according to a recent deep dive on the matter from Reuters. In Venezuela, the Petro was conspicuous by its absence, and stated the following:

The hunt turned up little evidence of a thriving petro trade. The coin is not sold on any major cryptocurrency exchange. No shops are known to accept it.

Worse still, those limited number of people who admitted to buying the Petro said they’d been “Scammed,” according to the report.

In the simplest terms, even in its country of birth, Venezuela, the Petro is a non-event in most ways that matter. The first notable problem is that even though the Bolivar is close to worthless, the people of Venezuela aren’t inclined to use the cryptocurrency. That’s telling on its own.

How much is a Petro worth? The fact that people aren’t using the Petro also means that it is hard to get a handle on its value. In turn that makes it hard to fulfill the monetary role as a unit of account.

Can Maduro mandate the Petro’s popularity? The president has ruled that Venezuela’s banks must accept the Petro, but it is hard to see how that means that the populous will suddenly start using the cryptocurrency.

But most of all it will likely solve nothing. The major problem is the hyperinflation and smart currency experts don’t see adopting the Petro as a help. The currency strategists at New York bank Brown Brothers Harriman wrote the following in a recent report:

We think this is yet another gimmick that does absolutely nothing to address the nation’s deep structural problems as its struggles with default.

The number one problem according to BBH is that the government has persistently failed to deal with its massive overspending and deficits. Until that happens, “nothing it does will address this hyperinflation,” the BBH report says.

Simon Constable is a writer, economics commentator, and a fellow at The Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise.

Bron: Forbes