Rising inflation is something that most Brits are familiar with, with the current rate of 2.5% far in excess of the Bank of England’s (BoE’s) target and contributing to a higher cost of living.
However, this pales in comparison with a number of developing countries across the globe, with Venezuela providing a relevant case in point. Inflation here has spiralled out of control in recent times, while it’s expected to peak at an incredible 1,000,000% by the end of 2018.
Venezuelan President Nicolas Maduro has proposed a number of unique measures to counter this threat, with a heavy focus being placed on supposedly price stable cryptocurrencies. But what exactly is the plan, and will it help to further legitimise the cryptocurrency market?
Pegging the Bolivar to the Petro – A Plan to Minimise Inflation
Typically, banks will increase interest rates in a bid to reduce inflation, but this measure would prove largely ineffective given the financial challenges facing Venezuelan citizens.
Instead, Maduro has moved to peg the stricken Bolivar to the state-backed Petro, with this price stable cryptocurrency having being launched in December. It was always intended that this currency would supplement the plummeting Bolivar, while also circumventing U.S. sanctions.
By pegging the Bolivar to the Petro, it’s hoped that the volatility of the former will be restricted. While this move should certainly ensure that the value of the Bolivar shifts within an ever depreciating range, the question that remains is whether it will help the government to achieve its ambitious devaluation target of 96%.
Will the Plan Work and Serve to Further Legitimise Cryptocurrency?
This is undoubtedly the headline act in a sweeping reform, and one that will also involve a 3,000% hike in the minimum wage and hefty corporate tax rate increases.
The issue is that many experts question the validity of the Petro, with some even arguing that it may not exist at all. In theory, this price stable cryptocurrency is pegged to the country’s vast reserves of oil, gas and gold, but this relationship has proved hard to quantify while economists have noted that so-called stablecoins are usually tethered to one or more fiat currencies.
It’s also fair to say that both Venezuelan citizens and investors remain sceptical of the Petro, with the former largely turning to Bitcoin to alleviate their financial issues. In fact, a total of $1.009 million Bolivars were exchanged for Bitcoin in April this year, with trend set to continue in the near-term.
Investors have also tended to avoid the Petro, while leveraging the volatility of the Bolivar through CFD trading and similar vehicles that negate the burden of ownership.
With these points in mind, the odds would appear to be against the state-backed Petro achieving its goals, while this may even be a smokescreen to distract from Venezuelan’s mounting national debt.
Furthermore, there’s a chance that the deployment of the Petro could undermine the acceptance of cryptocurrency across the globe, rather than helping to legitimise its presence.