Venezuela’s economy has hit rock bottom. The situation has grown so dire that humanitarian aid is being doled out to help those who are financially strapped.
Today, Venezuelan troops are fighting off citizens as they try to block the aid from reaching them.
Aggravating the situation for so many of the country’s citizens is the collapse of its currency. Called the bolivar, this Venezuelan currency is virtually worthless. Inflation has soared so high that basics items, such as food and medicine, are too expensive for citizens to afford.
As the country’s situation worsens, the issue of digital currencies is resurfacing. The subject of central bank digital currencies (CBDC) was broached recently by a researcher at the University of Luxembourg. Hossein Nabilou penned a report fittingly entitled “Central Bank Digital Currencies: Preliminary Legal Observations.”
Nabilou focused on the European Central Bank (ECB) needing to consider launching a digital currency (CBDC). However, the researcher touched on Venezuela in making his case.
He found that despite the benefits that could result from CBDCs, central banks have managed to come up with every excuse imaginable to block digital currencies.
Financial Hurt Deteriorates Into Chaos
Desperately needed humanitarian aid for Venezuelans is being blocked at the border of Venezuela and Columbia as of Saturday. The blocker is dictator President Nicolás Maduro. The self-declared interim president Juan Guaidó is pressing for help in getting the aid into the country.
Maduro isn't even supposed to be the president. In January, he was voted out largely because of the country’s miserable financial situation.
At least two people reportedly were killed this weekend. Civilians are fighting Venezuelan troops ordered by Maduro to stop the aid from coming across the border.
VIDEO: A pick-up truck carrying Brazilian humanitarian aid for Venezuela heads for the Venezuelan border pic.twitter.com/y611B26yc7
— AFP news agency (@AFP) February 23, 2019
#DEVELOPING #WATCHLIVE Under the direction of Cuban agents dressed as #Venezuela National Guard officers, forces are attacking civilians in Ureña, Táchira. Very tense & dangerous situation developing. https://t.co/OTHLoo4M91
— Marco Rubio (@marcorubio) February 23, 2019
Venezuela Highlights a Cryptocurrency's Benefits
Questions are being asked about how digital currencies could help countries avoid catastrophes like those faced by Venezuelans.
Digital currencies issued by central banks is controversial because the risks mitigate many of the benefits.
Nabilou’s report pointed out the benefits of CBDCs. Such currencies can provide:
- price stability
- smooth operation of payment systems
- better monetary policies that have fewer constraints
The decision to issue CBDC should be made taking a full account of a set of broader policy objectives, including safety and efficiency considerations; economic and legal considerations such as technological neutrality; and the users’ freedom of choice of means of payments.
Why Central Banks Aren’t Buying It
There have been two nearly-failed attempts to create CBDCs in Ecuador and Venezuela, Nabilou points out.
In the report, Nabilou cited myriad reasons why central banks were hesitant about launching their own digital currencies. Reasons include the constitutional constraints that are in place for many jurisdictions. Creating a CBDC could breach government regulations.
Nonetheless, despite its potential profound positive impact on the conduct of monetary policy, issuing CBDC may have certain unintended consequences. For example, it would lead to banking disintermediation as it would put central banks in the position to allocate scarce financial recourses.
No matter, the idea of CBDC is too-attractive-to-ignore for central banks, Nabilou wrote.
In the worst case scenario, the smart contracts that are part of digital currency contracts could backfire.
[A digital currency] launch would not only give rise to concerns about user’s privacy, but also enable central banks to impose negative interest rates by slashing users’ CBDC deposited with central banks.
Cryptocurrencies and their impact on central banking have sparked a policy debate on how to address the potential threats of cryptocurrencies, Nabilou acknowledged.
While policymakers remain largely skeptical about the potential benefits of private cryptocurrencies, they have been actively investigating the potentials of cryptocurrencies, their underlying technology, and the venues for regulating or otherwise influencing them with the aim of minimizing their social costs in terms of externalities that they may pose to the financial system.
The Survey Says
Nabilou isn't the only one raising the topic of CBDCs. CCN reported on a survey commissioned by the bank of central banks, the Bank of International Settlements on CBDCs. While several reserve banks are researching digital currencies, their work is mostly conceptual. Consequently, only a handful of them have any intentions of issuing a CBDC in the near future: