Venezuela's Socialist Regime Is Mining Bitcoin In a Bunker to Generate Cash

The socialist regime once cracked down on bitcoin miners. Now it's mining the digital asset itself.

Dec 16 2020, 1:28pm

At a military base outside Caracas, Venezuela, state video footage shows officers in green fatigues cut a blue ribbon donned with a cluster of glossy balloons. Then, the men pry open the doors of a narrow, dimly-lit bunker.

But the balloons weren't inaugurating a new weapons factory or training facility. They marked the opening of a new bitcoin mining farm.

Venezuela’s President Nicolás Maduro needs cash to sustain his grip on power after muddling through one of the worst economic implosions seen in recent modern history in the Western Hemisphere. It appears that Maduro’s last ditch effort to buoy Venezuela’s shriveling economy is to dig deep for this digital asset and sell it for hard cash.

Members of Venezuela’s army assemble specialized computers used for producing bitcoin, a digital asset that can be traded in for hard currency like dollars and euros. Credit: 61 Brigada of the Venezuelan Army.

“In a strategic alliance with private capital, the Bolivarian army inaugurated the first center for the production of digital assets at the Fuerte Tiuna facilities,” said a spokesperson in footage published by state television in late November.

Venezuelan General Domingo Antonio Hernandez Larez details the project in a cramped conference room, then he and other officers fondle a few S9 AntMiners, a type of specialized computer used to mine bitcoin, the volatile cryptocurrency whose price is scraping all-time-highs of just under $20,000 per coin.

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“This center of digital asset production will ensure self-financing sufficiency within the military,” the Venezuelan state TV official explains. “These mining activities will be key for increasing revenues for the country.”

In 2014, the collapse in oil prices shocked then recently-elected Maduro and his government’s finances. The next five years of decline in oil exports - Venezuela’s main economic engine - meant that the government was spending more than it made. Then in August 2017, the U.S. hit the government with tougher sanctions on top officials and state-run entities in response to what it alleged were authoritarian tactics and human rights abuses.

Raul Gallegos, director at Control Risks, a risk-assessment firm, worries that the Venezuelan military’s thrust into crypto mining could be used to hide illicit activity.

“Who would be wanting to buy this bitcoin from the military? People who want to launder money?” Gallegos said to VICE World News. “Right now, with this regime becoming increasingly criminalized, this is one example of the types of businesses that the regime allows the people to engage in and turn a blind eye to it so they can get extra money and extra salary and engage in criminal activity that can later be used against them to strong arm them.”

The U.S. sanctions mean that Maduro  - who has been charged with drug trafficking by the American government - and his inner circle can barely use the global financial system. They can’t buy and sell using dollars. The local currency, the Bolivar, has been rendered all but worthless by hyperinflation. Meanwhile, Venezuela’s opposition has declared Maduro an usurper of power and recognized Juan Guaidó the legitimate president of Venezuela in 2018, backed by an international coalition including the United States, Brazil and Colombia. Though the opposition’s campaign to unseat Maduro has floundered, they have successfully weakened Maduro financially.

In response, Maduro ordered the military to mine gold in southern Venezuela. It also partly explains why his government continues to allow and allegedly profit from drug-trafficking through its airstrips, sea ports and shared border with Colombia - often at the behest of military officers. Still, the scramble for dollars is palpable in Venezuela.

With the sanctions squeezing Maduro like never before, his cronies needed to improvise. And that’s where bitcoin mining comes in.

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What’s ironic is that Venezuela’s military allegedly used to crack down on bitcoin miners. Three years ago members of the army were accused of raiding mining farms and stealing equipment, and at times even the bitcoin keys themselves from miners. They justified the move because crypto miners were siphoning off too much electricity from the people’s grid. 

Juan José Pinto, the CEO of DoctorMiner, a private crypto miner in Venezuela, attributes the notorious blackouts of 2018 to poor maintenance in the grid. The blackouts coincided with an uptick in crypto mining.

“Now that the government has changed its priorities, mining crypto is going official and they are trying to show what’s happening. Now that it’s accepted by the government, they’re making it official,” he said.

“The military is mining because of U.S. sanctions. You’re not allowed to gain access to the dollar or any other international currency that easily, but now with mining bitcoin the military can get access to hard money extremely easily. And the coins that you get by mining are virgin coins that you can exchange easily.”

There’s another reason. Bitcoin miners love Venezuela because electricity is virtually free. Miners convert electricity into bitcoin by solving a set of computational problems that validates the next block of transactions on the cryptocurrency’s underlying network. Cheap electricity is key for profitable crypto mining. 

Instead of originally taking aim at crypto mining, Pinto told VICE World News that the government became obsessed with creating its own crypto currency backed by oil reserves: the Petro. It was launched in 2018, but failed. Fast forward to 2020 and Maduro has changed his tune. In September, the country rolled out a series of laws and regulations that it hopes will save its sinking economy. Part of this so-called ‘anti-blockade law’ is a set of regulations for crypto mining.

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It appears this is a page right out of Iran and China’s book on how to do business in the 21st century. One is limited by harsh U.S. sanctions. The other has an abundance of cheap electricity. Both Iran and China have powerful crypto mining industries. For Iran, it’s a way to get around the sanctions against it. In fact, in early November the Iranian government adopted BTC for international transactions.

Venezuela’s economy wasn’t always this strange but it has always depended on a single commodity: oil. Twenty years ago, a former paratrooper named Hugo Chávez was elected president on an anti-corruption platform. His populist, socialist program grew increasingly aggressive when the charismatic Chávez began spending the country’s oil production bonanza on social programs and other vehicles that boosted his popularity. Oil traded at all-time high prices. The poor received free housing and education. Gasoline was free. 

Then, Chávez died.

A woman walks past a mural with an image of late Venezuelan president (1999-2013) Hugo Chavez in Caracas on August 22, 2018. Photo by FEDERICO PARRA/AFP via Getty Images.

In 2013, his hand-picked successor Maduro replaced him as president, and the following year the price of oil collapsed, triggering a slow descent into economic chaos. Venezuela’s economy has shrunk by 75 percent since December 2015. At the same time, the blackmarket has grown from 18 percent of GDP in 2018 to 25 percent in 2020, estimates Asdrubal Oliveros, an economist at Caracas-based consultancy Ecoanalitica.

Venezuela’s economy has been marked by extraordinary booms, and for the past 100 years those booms were fueled by petroleum. Now, Pinto says private foreign investors are approaching him with interest in setting up crypto mining farms in Venezuela.

“Venezuela’s crypto mining industry will get more structure. There will be more taxes. Miners will get charged for electricity,” Pinto predicts. 

“But it will stay competitive. If it can’t stay competitive, it will die - and the government doesn’t want to kill this.”

Tagged:

Tech, Technology, Bitcoin, world politics, cryptocurreny, bitcoing, worldnews, world privacy

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