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Unable to Get Dollars, Venezuelans Turn to Bitcoins

Restrictions in Venezuela have made foreign currency difficult to come by for its citizens, and have led to the country's first bitcoin exchange.

by Payton Guion
Oct 14 2014, 10:20pm

Twitter/IBTimesUK

Most of the world's economies run in accordance to the old Wu-Tang Clan mantra of C.R.E.A.M.: "cash rules everything around me." The idea is pretty straightforward: if you have cash, you can buy things. If you don't, you can't.

But in Venezuela, citizens can have buckets of bolivares (the national currency) and still find themselves unable to buy the sorts of goods that many in the developed world take for granted.

Currency controls imposed by the late Hugo Chavez in 2003 and maintained under his successor Nicolas Maduro make it difficult for Venezuelans to exchange bolivares for US dollars and other foreign currencies. They are also limited to just $300 for online purchases per year — a minuscule amount in a country that has to import almost everything.

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Hard currency is so scarce, dollars trade on the street for many times the official exchange rate. Meanwhile, the country's runaway inflation reached an annual rate of 63.4 percent last month.

This has driven an increasing number of Venezuelans to the freedom offered by bitcoin, a virtual currency outside of the control of any state or government. It is based on the properties of mathematics rather than relying on physical properties, like gold and silver, or trust in central authorities. Bitcoins can be earned as payment for goods or services, purchased at an online bitcoin exchange, or accumulated by "miners" who process transactions and secure the currency's network using special hardware and software in exchange for bitcoins.

Venezuelan access to bitcoins has been liberated with the launch of the first-ever Venezuelan bitcoin exchange marketplace: SurBitcoin, which opened at 12am on Tuesday, founder Kevin Charles told VICE News.

SurBitcoin was expected to open last week, Charles said, but various issues held up the launch. Users are now able to exchange bolivares for bitcoins on the site and skirt around government currency restrictions in the process.

The value of bitcoin has been very volatile over the past year — though it's more stable than the bolivar — and is rooted in the principles of supply and demand. To safeguard against inflation, only 21 million bitcoins will ever be available. Around 13 million bitcoins — roughly $4.9 billion — are in circulation. The exchange rateon Monday was about $380 for one bitcoin.

Bitcoin is gaining prominence due to the relative ease of transactions, its utility on the web, and because it allows users to defy the government's authority.

Venezuela's currency controls were implemented because of massive private capital flight in 2003. The country's foreign currency reserves took a huge hit, and the government began restricting exchanges. Since then, the only legal method for Venezuelans to get US dollars is through a government agency.

"For instance, if you want to travel abroad, you have an annual max quota of $2,500 USD per citizen," a prominent Venezuelan business professor and bitcoin-booster, who asked that he not be identified out of concern that he could face harassment at home, told VICE News.

But the currency controls are complicated by the fact that Venezuela imports between 85 percent and 90 percent of the goods consumed in the country.

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"The current economic situation has increased the need for dollars to import the things that have shortages, but there aren't enough goods offered in the black market, so the price has increased exponentially in the last months," Randy Brito, founder of BitcoinVenezuela, a blog that supports bitcoin and other crypto-currencies, told VICE News.

To secure those imports, people often need dollars — which are held by the government. If you can persuade the government that you're importing necessities like food or medicine, the exchange rate is 6.3 bolivares to $1, the Venezuelan business professor said. For less necessary goods, the government will exchange 11 bolivares per $1 in an auction-type process, but that doesn't cover all goods.

The government recently introduced a third and less favorable category of exchange — the closest the government will get to the actual rate — in which the government will change around 50 bolivares for $1.

Because the government runs these exchanges, it reserves the right to reject any requests for changing money as it sees fit. People then turn to the black market. The business professor said that the black-market exchange rate was 100 bolivares per $1 as of last week.

These problems have left people desperate for other monetary options. Since Venezuelans are hard-pressed to convert their bolivares into dollars, they are increasingly interested in converting bolivares into bitcoin. Brito noted that while it's difficult to use bitcoin for purchases within Venezeula, the currency can be used to acquire more dollars than would otherwise be possible.

"When you want to send money abroad or you want to pay online, what really matters is the price of the bitcoin within a 10-minute window," the business professor said. "It offers a way to buy stuff online without being restricted to $300 per year per citizen."

Ivan Montilla, a Venezuelan entrepreneur who gives presentations about virtual currencies across the country, told VICE News that bitcoin adoption in Venezuela has been slow to this point because trading precious dollars for bitcoins isn't palatable to many in the country.

"What happens is that one bitcoin is so expensive for us, that its adoption has been slow, despite the effective awareness in social networks," Montilla said. "The price of bitcoin exceeds the annual quota of dollars for our use on the internet, so people prefer to use their dollars on Amazon than for bitcoins."

Now that SurBitcoin allows users to trade their bolivares for bitcoins rather than dollars, it will be interesting to see how quickly the crypto-currency takes root in a country whose monetary policy has been so poorly managed — and whether the government, which has avoided any stance on bitcoin, will be forced to respond.

Follow Payton Guion on Twitter: @PaytonGuion

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