Coin Center Travel Series: Venezuela by way of Medellín, Colombia

This is the latest installment of Coin Center’s multi-part travel series examining how cryptocurrency is used around the world.

One cannot talk about cryptocurrencies in Colombia without talking about neighboring Venezuela. This is partly because so many Venezuelans who are now living in Colombia are involved in various aspects of cryptocurrencies. It is also because of the extreme economic circumstances that these Venezuelans have found themselves, which provide impetus for perhaps the most interesting on-the-ground uses of digital asset storage and payments yet seen during this series.

Six years ago I spent the summer in Caracas, which is the capital of Venezuela. This was when I became aware of and interested in Bitcoin. There seemed to be utility in a digital ‘money’ that could bypass capital controls, had a stable rate of inflation and to which access could not easily be restricted. A surprising number of Venezuelans had Blackberries, which were relatively smart phones at the time. There seemed to be potential for greater adoption of Bitcoin, or other cryptocurrencies, but much of the requisite infrastructure to facilitate this adoption and use was not yet in place.

It was therefore somewhat of a ‘full circle’ experience to return to this part of the world in early 2019 and to see the progress that people have made in realizing this opportunity. Much more infrastructure for cryptocurrency adoption is now in place and the current economic and political situation is providing spurring increased cryptocurrency use amongst certain people.

Approximately two million Venezuelans are now living in Colombia. This may help explain why, during the fourth quarter of 2018, the two highest countries on localbitcoins.com by transaction volume were Venezuela and Colombia. While these amounts may not be huge compared to the remittances that flow into the two countries each year, the fact that some Venezuelan migrants who do not have access to a bank account – and need to send money back to family and friends at home – now have access to an alternative is a noteworthy development.

Why are cryptocurrencies useful to people here?

Adding new options for better financial management is a big deal for people here. Throughout Latin America people have developed elaborate risk management practices to store and maintain their wealth, as Alejandro Machado (a Venezuelan) and James Downer of the Open Money Initiative explained to me. They were in Medellin hoping to understand better how Venezuelans use digital money, which is an extension of similar research they did last year. “They really want sound money… that’s why they want US dollars,” Alejandro explained. Some people are fortunate enough to have access to a bank accounts where they can store US dollars or Euros. Others keep paper USD/EUR, precious metals or purchase property.

“In Venezuela, if I had to make a hypothesis, I believe that the lower to middle classes are using cryptocurrencies”, Angel Di Matteo (a Venezuelan) from Diario Bitcoin suggested to me. This is because these people are less likely to have access to more mainstream options and so they opt for whatever else works – even if sub-optimal. These practices might not be familiar to people who have not lived through an economic history littered with inflation and devaluations, as people here have.

This also points to an interesting reason why and how cryptocurrencies are being used. “Cryptocurrencies, more than money [a means of payment], are a means by which to invest, a means to store value”, Angel clarified. It is an example of Gresham’s law in action. “Obviously, if the prices [of Bitcoin] fall [the equivalent of] US$1,000 or US$2,000, people lose value. However, the Venezuelan Bolívar will always have a lower value per dollar… This is why people hold onto cryptocurrencies”, he added.

Onboarding new merchants and users

This this experience leads people like George Donnelly, who is Dash’s coordinator for Colombia and Latin America, to claim that, “the developing world is where crypto is most likely to be adopted”. Having just returned from Cúcuta, which lies on the Colombia-Venezuela border, he explained to me that, “around 50,000 Venezuelans cross the border to shop each day. It is a pain to carry cash for various reasons. We’re helping set-up merchants there to accept Dash.” Aside from the practical reasons for not carrying large amounts of cash, he told me that merchants wanted to avoid banking relationships. “These merchants tend not to like banks…. It is challenging for people to get a bank account. The government also levies charges and fees directly from bank accounts… [and] also take taxes directly as money enters accounts. They’ll freeze accounts without providing a rationale.”

With some of the prior obstacles to cryptocurrency adoption out of the way, like mobile wallets and explainers in Spanish on YouTube, he suggested the next obstacles might lie in fiat-to-crypto on-ramps. “It would be good to have more exchanges – at the moment the most used service is LocalBitcoins.com… [we] also need the ability to hedge against volatility with a Colombian Peso stable coin in a mobile wallet with a good UI”, George concluded.

Some of these obstacles were on full display early in the month when I stopped by a Dash get-together in Medellin. Dash representatives were helping people open mobile wallets and buy lunch with those wallets at nearby stores. “How did you find out about Bitcoin?”, I asked someone next to me. Usually a good conversation starter – for once this question turned out to be inappropriate. It was however indicative that something different was going on here. “I didn’t know anything about cryptocurrency before coming here… I don’t have any Bitcoin”, was the response. Many of the approximately 30 people present had never used a cryptocurrency wallet before and were simply interested in something that gets the job done. “It’s not different to money like pesos… or bolívares for the Venezuelans”, the instructor explained. “Note down your recovery phrase on paper because you might lose your phone or… more likely… you might have it robbed”, she added. Purchasing an arepa for lunch, there was a brief moment where the waitress and I became confused with the fluctuating crypto-to-peso exchange rate and how it was displayed. Nevertheless, we eventually found our way around the interface and everything processed smoothly.

Walking back to the subway after the get together, I noticed from the corner of my eye a string of small stores – just a few – with plaques out front saying that they accepted various cryptocurrencies as payment.

Building more user-friendly onramps

In the near future it is likely that more stores will display similar signs. This is because there are people are actively working to make it happen. “Wherever there are economic problems, Bitcoin will be a tool”, Typson Sanchez (a Venezuelan), the Co-founder & CTO of Panda Exchange, told me. Most of the exchange’s team is from Venezuela – Mérida and Ureña – and moved to Bogota recently for security reasons. “We wanted to open a temporary exchange in Venezuela, but we had to make many political compromises so we gave up on that.” Totally self-funded and operating for almost two years, 90% of the exchange’s 7,000-16,000 users are Colombians and Venezuelans. “We’re creating solutions for real use, for use in daily life, because that’s what we’re missing”, he declared.

At this point in our interview, Typson unveiled a kind of credit card machine imported from Singapore, but for buying cryptocurrencies. I asked if I could try it out. We exchanged some cash, scanned my wallet’s QR code, and the Bitcoin was in my wallet within a few seconds. “This is a solution that we’re going to take to the neighborhoods, to the shops… tools that anyone can use”.

At the moment there are legal and regulatory obstacles to Panda Exchange achieving its goals in Colombia. “We’re hoping that Colombian regulation allows us to operate here with [exchange from] peso so that we can expand”. They do not wish to end up in the same situation as Buda exchange did last year. It remains to be seen what the outcome will be – no potential changes to regulations or laws were indicated to me throughout the two months that I spent speaking with people in Colombia.

By contrast, the Venezuelan government is very aware of cryptocurrencies. Famous for promoting the Petro, the Venezuelan government has been sequentially imposing controls over different aspects of cryptocurrency use. At first efforts were made to clamp down on mining, as Typson from Panda Exchange found out first hand. Once a licensing system was implemented, the focus then shifted to companies that provided fiat-to-crypto exchange services. “Rather than chase those who use cryptocurrencies, the decision was made to go after the mechanisms by which people trade these cryptocurrencies”, Angel explained. “Now they are going for people who receive excessive amounts of money and cannot justify it… because banks have to pass-on information to the national government about what their clients do,” he added.

Where this situation goes now is anyone’s guess. “You know if they want to block access [to cryptocurrencies] they can just import the technology from the Chinese”, Alejandro grimly pointed out to me. There are of course other more fundamental issues that impede cryptocurrency adoption and use – as the blackouts in Venezuela during March demonstrated clearly.

Necessity is the mother of invention – and also control

An enormous amount can be learned about how and why Venezuelans are using cryptocurrencies from Colombia. Venezuela is likely not becoming a ‘Bitcoin Nation’ and the majority of the population does not use cryptocurrencies. But do they have to for this software to be beneficial to those who use it? For those whose extreme circumstances have created the need to find ways to store their wealth, but do not have access to more mainstream ways to do this, cryptocurrencies present a better alternative than watching what little wealth they possess inflate away. The means by which parts of the Venezuelan government are going about controlling use of cryptocurrencies are also interesting. They provide a playbook for what may occur in other parts of the world where similarly extreme economic and political circumstances emerge and cryptocurrencies are available.