Ernesto, a gastronomic entrepreneur in Cumaná, a coastal Venezuelan city facing the Caribbean Sea, initially thought that Venezuela’s new digital bolivar — English translation of “bolivar digital” — would be similar to a central bank digital currency.
He even started talking with friends in different crypto chat rooms about the announcement, until he understood that “digital” was just in the name.
“It’s a normal currency, fiat money. They are going to print a bill,” said Ernesto, who preferred to keep his last name anonymous.
The Venezuelan government launched a digital bolivar last Friday, and it is already generating uncertainty and nervousness, several locals told CoinDesk.
The new bolivar appears to be yet another attempt by the government to combat hyperinflation. Last year, according to the local central bank, inflation reached 2,958%, and some would argue that it was even higher.
Now, the digital bolivar consists of a new series of five banknotes and a government-issued coin that replaces the previous currency, the bolivar soberano, which was also known as the sovereign bolivar — English translation of “bolivar soberano” — from which six zeros have been removed. In other words, one digital bolivar is worth the same as 1 million sovereign bolivars.
There are no digital components that make the bolívar digital different from the sovereign bolivars, which could also be transacted electronically, Miguel López, a financial and accounting consulting partner at EY Venezuela, said.
The digital bolivar represents the third removal of zeros from the Venezuelan currency since 2008, when then-President Hugo Chavez removed three zeros from the original bolivar and created the strong bolivar (English translation of “bolivar fuerte”).
In 2018, beset by hyperinflation, Nicolás Maduro, the current president, removed five zeros from the bolivar fuerte and created the sovereign bolivar, which was removed from circulation last week.
According to Lopez, the removal of six zeros seeks to solve a daily problem for companies, public entities and payment systems that face great difficulties in operating with so many digits. Until last week, a kilo of meat alone cost about 33 million bolivars.
The different kinds of enterprise resource planning (ERP) software commonly used by Venezuelan companies don’t support so many bolivars in a traditional transaction – SAP’s ERP software, for example, supports a maximum of 21 digits – and many companies were forced to divide the sale of services into up to 50 invoices, said López, who added that such a large number of numbers also generated confusion when doing calculations.
With the latest attempt to remove zeros, however, the new digital bolivar is introducing other problems. “There is some nervousness about the future of the exchange rate. People are getting rid of the local currency and are desperately looking for dollars, to protect their purchasing power,” said Alejandro Castro, a Venezuelan economist and operations manager at consulting firm Econométrica.
In order to adapt to the new currency, the Venezuelan financial system was halted from Sept. 30 until Oct. 4. During that period, the unofficial quotation of the sovereign bolivar was devalued from 4 million per U.S dollar to 5.6 million, since the official market didn’t operate, Ernesto said.
After the system returned, and to calm the waters in the exchange market, the Central Bank of Venezuela (BCV) injected $50 million into the official exchange market on Monday, which caused the new bolivar to appreciate against the U.S. dollar during the week.
José Guerra, an opposition congressman and economist, wondered in his Twitter account if the BCV will have enough reserves to maintain the current U.S. dollar rate.
“My answer is no,” he said, adding that the BCV is opting to burn the reserves it has to keep the U.S. dollar artificially low. That strategy, he added, could set the stage for a mega-devaluation in the immediate future.
“We’ve already seen that when the dollar has fallen and then risen,” he added.
A digital bolivar, but physical
“In the end, the digital bolivar is digital in name, not in practice,” Castro told CoinDesk.
The term digital, Castro added, is due to a future intention of Maduro to digitize transactions and reduce the use of banknotes.
“However, in practice, it is impossible to carry that out, due to a series of local limitations,” said Castro, who added that the banking penetration rate is 50% in the Latin American country.
The penetration rate of smartphones in Venezuela was 38 percent in 2018, according to a Pew Research Center study, even though locals consulted by CoinDesk said the figure is now 40% to 50%.
The approach of Maduro’s government to a digital currency began with the petro, an oil-backed cryptocurrency that was created in 2017 by his administration, apparently to evade the trade embargoes imposed by the U.S. government.
However, the petro lost its relevance in just three years.
“Even the Venezuelan government doesn’t want anything to do with the petro. It never followed up on it,” Ernesto said, adding that not even government entities use it for payments. Nor do gas stations, which are in private hands but which are closely regulated by the government.
But beyond the failure of the petro, crypto hasn’t stopped growing in Venezuela, a country that in 2020 recorded the third-highest cryptocurrency usage in the world, according to Chainlink’s Global Crypto Adoption Index.
At his store, Ernesto mainly receives USDT, although he also accepts bitcoin, dash and bitcoin cash via Binance’s peer-to-peer service, which, he added, has greatly relieved local merchants.
“You get bolivar and convert it to crypto to hedge against inflation,” Ernesto affirmed, adding that he prefers to be paid later in dollars than with bolivars on the spot.
Crypto also grew because of the difficulties to conduct transactions in physical bolivars, as high inflation and low denominations of banknotes meant that piles of paper had to be carried to make even the smallest purchases.
The impossibility to pay with bolivars also led to the establishment of the U.S. dollar as the unit of reference. According to Castro, Venezuela is a de facto dollarized country, where prices are listed in U.S. dollars.
For smaller merchants, who work in dollars, the only thing that matters is the U.S. currency. “For us, the bolivar is practically irrelevant. We pay suppliers in dollars, all prices are dollarized. The only payments in bolivars are basic services, such as water, electricity and telephony,” Ernesto said.
If Ernesto accepts bolivars, he immediately seeks to convert them to dollars through Reverse, a platform that allows the transfer of local money to reserve dollar, a stablecoin that maintains one-to-one parity with the U.S. dollar.
Nevin Freeman, Reserve’s CEO, told CoinDesk that the company went from 10,000 Venezuelan users in March to 50,000 today, while merchants accepting payments with the application went from 4,000 to 6,000.
According to Freeman, Venezuelans first used the platform to transfer money earned abroad to bolivars, but then to save in dollars. Now, they use Reserve directly to make payments without converting money to local currency, he added.
Everything remains the same
At present, the highest denomination banknote of the digital bolivar is around $20, as opposed to the highest denomination of its predecessor, the sovereign bolivar, which was equal to $0.25, said Ernesto, who added that the change can make transactions easier, because fewer banknotes are needed.
Back in 2018, Reuters photographer Carlos Garcia Rawlins showed in pictures the piles and piles of bolivars needed to buy such basic items as a kilo of chicken in Caracas, the capital city.
Angielo, a community manager from the city of Carora who owns cryptocurrencies, said that bolivars are used in small towns or territories isolated from cities, such as fields, hamlets or villages, while the U.S dollar dominates transactions in general.
The shortage of physical money generates unusual situations, such as using gold as means of payment. That situation was recorded months ago by a Venezuelan in a supermarket in Bolivar, a state in the eastern part of Venezuela. The bolivar was used to wrap the gold.
Ernesto, for one, isn’t impressed by the government’s new announcement.
“We all already know that it will bring inflation, because in the last reconversions, the same thing happened. They worked for a very short time, because the dollar started to increase. The reconversions are useless,” he said.
Eduardo, a data marketing executive in Caracas, said he believes that it is unsustainable to maintain the bolivar as the currency of common use, although he doesn’t think foreign currency will solve the problem, either.
“Without a sufficiently robust economic and legal framework to support these decisions, the government is condemned to repeat the cycle of devaluing the currency even more,” he said.