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Venezuela to remove six zeros from its currency in response to inflation

August 9, 2021
in News
Venezuela to remove six zeros from its currency in response to inflation

Venezuela has been in a spiral of currency depreciation for many years, and things don’t seem to be stopping anytime soon, especially with the U.S. embargo and sanctions. After a first unsuccessful attempt at a national cryptocurrency in 2018 – the Petro, indexed to a barrel of Venezuelan oil – the country is being forced to repeat the experiment, in the face of another massive devaluation of its fiat currency.

A devaluation of exactly -99.9999%

Here we go again, the Venezuelan government and its central bank have officially announced that they are going to launch a new cryptocurrency on October 1st: the “Bolívar Digital”.

Unlike the Petro, this time it will be a central bank digital currency (MNBC), as it will be issued and managed by the Banco Central de Venezuela.

This new form of Bolívar is accompanied by a very strong devaluation of its fiduciary version, since 1 Digital Bolívar will be worth 1 million current sovereign bolivars: it will be necessary to remove no less than 6 zeros (-99.9999%) to make the conversion from the old to the new currency!

Bitcoin’s “strong” fluctuations? Talk to the Venezuelans

This is the second time in three years that Venezuela has devalued its fiat currency, as the bolivar had already suffered a five-zero cut in 2018.

And unfortunately (or fortunately in a sense), whether the Digital Bolívar is digital or not will most certainly reveal to the world what is however an obvious fact: MNBCs will also suffer inflation (in this case hyperinflation) as they can always be printed at will by central banks.

As a local economist, Luis Vicente Leon (quoted by Bloomberg), summarizes it very well:

“Removing these zeros does nothing to solve the reason behind the problem. Without solving the root of the problem, we will have the same problem in a few months”.

For MNBCs will always be fiat currencies, i.e. based solely on trust in a state and its central bank. If this confidence is already out of date in the United States and the European Union, it is as good as zero with respect to the contested government of Nicolás Maduro.

If the Petro was already a failure, which was at least supposed to be backed by barrels of oil produced by Venezuela, it is to be feared that the Bolívar Digital will have an even worse fate. Considering its risk of rapid depreciation, this MNBC may not go down well with the few remaining allies of the regime either, unlike bitcoins which have been accepted by Iran and Turkey, among others.

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