Conceptual image for worldwide cryptocurrency and digital payment system.
Conceptual image for worldwide cryptocurrency and digital payment system. (Photo Credit: www.shutterstock.com)

To shore up a collapsed economy, Venezuelan President Nicolas Maduro on Sunday announced the creation of a cryptocurrency, the ‘petro’ backed by the world’s largest oil reserves, to counter U.S.-led financial sanctions that clog off his country’s access to dollars, according a Reuters report.

“Venezuela will create a cryptocurrency,” backed by oil, gas, gold and diamond reserves, according to Reuters Maduro said in his regular Sunday televised broadcast, a five-hour showcase of Christmas songs and dancing.

Washington has levied sanctions against Venezuelan officials, PDVSA executives and the country’s debt issuance.

Venezuela’s economy looks like a shipwrecked tanker

After years of mismanagement, Venezuela’s all-important oil industry is listing like a shipwrecked tanker.

According to data provided by the government to OPEC, oil production in October averaged 1.96m barrels per day (b/d), down 130,000 b/d from September (and 361,000 b/d from October 2016).

Subtract oil supplied for almost nothing to Venezuelans and to Cuba, and shipments to repay loans from China and Russia, and only around 750,000 b/d are sold for cash, according to Francisco Monaldi, a Venezuelan energy economist at Rice University in Texas.

And although the oil price is up from its low of 2015, it is still a little more than half its level of 2012.

The petro, Maduro said, would help Venezuela “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade.”

Alternative currencies are the future: why it matters for development

Behind most cryptocurrencies is a simple technology known as “blockchain”, a system residing in multiple computers that allows for peer-to-peer financial ledger recording of all transactions occurring in a network.

In April 2017, Japan accepted BitCoin as a legal payment method for retail markets. After threatening digital currencies last year, the Russian government took a U-turn. President Vladimir Putin met the developers of Ethereum and committed to recognising cryptocurrencies in 2018.

Following an initial freeze, the People’s Bank of China readmitted withdrawals in BitCoin in June 2017, catapulting the currency to new heights. In the US, cryptocurrencies are becoming increasingly accepted as both a method of payment and store of value.

The Australian government will soon make it easier for new innovative digital currency businesses to operate, exempting traders and investors from goods and services tax.

It’s clear that cryptocurrencies will in the near future become much more common as methods of payment for a wide range of purchases, from online shopping to the local supermarket.

Developing countries are leapfrogging

Developing economies, too, are opening up to cryptocurrencies. In Venezuela, BitCoin has become the leading parallel currency. It provides millions of citizens with an opportunity to perform transactions and generate livelihoods, including buying food and other basic necessities in a country where official money is worth almost zero. It also allows them to purchase goods from overseas, overcoming ever-stricter capital controls.

In East Africa, local innovators have introduced cryptocurrency systems to support cross-border transactions, as exemplified by initiatives like BitPesa.

In South Africa, cryptocurrencies are becoming particularly popular. In Nigeria, local traders and activists believe this new money presents an opportunity to democratise the economy. This is propelled by the fact that people in Nigeria have been failed by conventional money.

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