VENEZUELA'S ADOPTION OF A CENTRAL BANK DIGITAL

CURRENCY IN THE CONTEXT OF INFLATION AND THE

DOLLARISATION OF PAYMENT TRANSACTIONS
An analysis of the roots of inflation and hyperinflation, and dollarization in Venezuela and
the benefits of implementing a Central Bank Virtual Currency

Student Name: Libia Ovaldo

SOAS ID: 685041
Supervisor: Prof. Costas Lapavitsas
Date: 08 September 2022
Word Count: 10,995 words (including abstract)
DECLARATION

I have read and understood the School Regulations concerning plagiarism and I

undertake:

 That all material presented for examination is my own work and has not
been

written for me, in whole or in part by another person(s);

 That any quotation or paraphrase from the published or unpublished work

of another person has been duly acknowledged in the dissertation; and,
 That I have not incorporated in this dissertation without
acknowledgement any work previously submitted by me for any other
module forming part of my degree.

Signed: Libia Ovaldo

Student ID: 685041
Date: 08/09/2022
ACKNOWLEDGMENTS

I would like to extend my sincere gratitude to my supervisor Costas Lapavitsas who enabled
me to accomplish this project. Further, I would like to express my sincere thanks to my
friends Jose David Acuna, Victor Alvarez, Greyzandra Teran, Polly Cook, and my entire
family for their continuous support and understanding throughout the course of the research
and writing of this project. I would also like to extend my sincere gratitude to my friend
Zorro.

Lastly, I would like to thank God for helping me through all the difficulties. Day by day, I
have experienced your guidance. It was you who allowed me to finish my degree. For my
future, I will continue to trust you.
 Abstract
In this dissertation, a political economy approach is used to provide a framework that enables
one to understand how the interaction among the state, the private sector, and workers in
Venezuela, has led to inflation, hyperinflation, and dollarization and how the creation of a
virtual currency by the Central Bank could help to overcome these problems, using secondary
data from various sources due to the absence of official statistics. Inflation was explained
using Marxist and post-Keynesian theories. From different institutions, some insight into
Central Banks' virtual currencies. This study demonstrates that the structural features of the
economy have driven all economic processes and are ultimately the cause of inflation and
hyperinflation and that the public won't accept the bolivar while the expectations of a
devaluation remain. Therefore, any form of bolivar will be successful, regardless of whether
it is physical or virtual. 
.
 Table of Contents
DECLARATION...................................................................................................................................2
ACKNOWLEDGMENTS.....................................................................................................................3
Abstract.................................................................................................................................................4
Chapter 1: Introduction..........................................................................................................................8
1.1 Introduction.................................................................................................................................8
1.2 Statement of the research problem...............................................................................................8
1.3 Research question........................................................................................................................9
1.4 Objectives of the study................................................................................................................9
1.5 Scope of the study........................................................................................................................9
1.6 Significance of the study............................................................................................................10
1.7 Justification of the study............................................................................................................10
1.8 In context: the Venezuelan economy during the last decades....................................................11
Chapter 2: Literature Review...............................................................................................................14
2.1 Introduction...............................................................................................................................14
2.2 The Marxist theory of Money....................................................................................................14
2.3 Inflation and hyperinflation According to Post Keynesian Theory............................................16
2.4 Central Bank Virtual Currencies................................................................................................18
Chapter 3: Inflation, hyperinflation, and dollarization in Venezuela...................................................23
3.1 Introduction...............................................................................................................................23
3.2 The roots of inflation.................................................................................................................23
3.2.1 Oil dependence and Dutch disease......................................................................................23
3.2.2 Evolution of the official and parallel exchange rate............................................................24
3.2.3 The monetization of PDVSA’s debt....................................................................................25
3.3 The dynamic of wages...............................................................................................................26
3.4 The USA sanctions....................................................................................................................28
3.5 Evolution of Inflation, Hyperinflation, and dollarization in Venezuela.....................................29
Chapter 4: Payment system and a CBDC in Venezuela.......................................................................32
4.1 Introduction...............................................................................................................................32
4.2 Advantages of CBDCs for emerging economies........................................................................33
4.3 Current situation of cash usage in Venezuela............................................................................33
4.4 Payment services providers in Venezuela..................................................................................35
Conclusions.........................................................................................................................................36
Bibliography........................................................................................................................................38
 List of Tables & Figures

Table 1. Venezuelan economy features 2021

Table 2. Jurisdictions’ Stated Policy Goals of Central Bank

Digital Currency
Figure 1. Percentual Variation of Venezuelan real GDP
1997-2017
Figure 2. PDVSA’s debt in millions of dollars
Figure 3. PDVSA crude oil production in mbd
Figure 4. Venezuelans’ annual inflation rate
Figure 5. Share of currency in public in M2
Figure 6. Number of operations by banking means of
payment
 List of Abbreviations

BCV Banco Central de Venezuela

CBDC Central Bank Virtual Currency
GDP Gross Domestic Product
IMF International Monetary Fund
M2 Money Supply
OPEC Organization of the Petroleum Exporting Countries
PDVSA Petróleos de Venezuela Sociedad Anónima
PMI Interbank Mobile payment
POS Point of sell
PSP Payment Service Provider
QTM Quantitative Theory of money
 Chapter 1: Introduction

1.1 Introduction
The purpose of this introductory chapter is to provide a brief overview of the aims and
objectives of this study. Further, it presents the motivation and justification behind the
investigation, followed by a brief overview of the Venezuelan economy, which describe
trough figures its main feature, the dependence on oil prices. Lastly, it will provide a brief
outline of what the remainder of the dissertation will include.

1.2 Statement of the research problem

The Venezuelan economy experienced a process of inflation that culminated in hyperinflation
between 2018 and 2020. Because of the loss of value of their bolivars, Venezuelans began to
save dollars in accounts with North American banks and to use private virtual currencies to
preserve the value of their money. In addition, the country's banking infrastructure was not
adequate to facilitate the number of transactions (La dolarización venezolana, un salvavidas
ante la inflación, 2021). Due to the increasing rate of inflation, in 2019 the Central Bank
issued a regulation promoting the use of electronic money by payment services providers to
reduce the need for cash. There was little private sector participation in this market, and only
a few initiatives had been undertaken without any success.

A combination of hyperinflation and electric crises that left the whole country without
electricity and affected electronic means of payment has resulted in people starting to use
dollars as a means of payment since 2019. Although there are no official statistics regarding
the number of transactions, according to private firms, 65% of all payments were made in
dollars in 2020 (Oliveros, 2021). On the other hand, as cryptocurrencies have developed in
recent years, a debate has arisen as to whether central banks would be able to issue digital
cash, since one of the goals of these type of schemes is to overcome the negative aspects of
cash, including (i) cash logistics are expensive (manufacturing, distributing, and withdrawing
cash requires expensive infrastructure; (ii) cash deteriorates over time; (iii) it's unhygienic
and can spread disease; and (iv) cash is susceptible to counterfeits. These facts led to think of
the feasibility to implement a virtual currency of central bank in Venezuela in a context of
dollarization.

1.3 Research question

- Is it possible that a Central Bank Virtual Currency in Venezuela will assist in
overcoming the current difficulties associated with inflation and dollarization of
payment transactions?

1.4 Objectives of the study

The purpose of this study is to examine whether a virtual currency issued by a central bank in
Venezuela, where the dollar has displaced the bolivar in most transactions, can benefit the
economy, assist in reversing dollarization, and help to overcome problems associated with
cash provision and payment systems. The specific objectives are to:

i) Investigate the structural causes of inflation and hyperinflation in the Venezuelan

economy.
ii) Describe the process of dollarization in Venezuela.
iii) Explain the difference between virtual currency models offered by central banks,
as well policy goals.
iv) Analise the benefits that would accrue to Venezuela's economy as a result of the
implementation of a virtual currency by the central bank. 

1.5 Scope of the study

This study focuses on determining the benefits of implementing a virtual currency for the
Venezuelan economy, which is characterized by continuous and persistent inflation that led
to hyperinflation between 2018 and 2020 and to dollarization in 2019. Data on
macroeconomic variables will be collected from official sources in Venezuela to explain the
structural roots of inflation. For the purposes of defining money, inflation and hyperinflation,
post-Keynesian theories and Marxist theory about the creation of money will be used. Even
so, the study is limited to other sources, such as private firms, when analysing the process of
dollarisation. In addition, there is no empirical evidence regarding central bank virtual
currencies since a few countries have recently implemented these schemes in their
economies.

1.6 Significance of the study

This research will provide new insights and expand on the current understanding on a topic
that is still in development, such as the central bank virtual currencies weather they can be
used to improve public confidence in a domestic currency, which has been replaced for a
foreign currency. A valuable outcome of the study could be useful to the authorities at the
Central Bank of Venezuela to enhance their knowledge of the subject and make informed
decisions that would boost economic activity and help a segment of the population that lacks
access to hard currency.

1.7 Justification of the study

The purpose of this study is to provide an alternative to deal with the lack of confidence in
the Venezuelan currency due to its constant loss of value, which has led to dollarisation and
interferes with the government's ability to use monetary policy to manage the economy.
Among other reasons, the inefficiency of the banking payment system in providing secure
means of payment has compelled people to use dollars in their daily transactions.
Additionally, Venezuela incurs a high cost of producing cash due to the importation of most
of the components used to produce banknotes. To alleviate this problem, the Central Bank of
Venezuela enacted a regulation on the 17th of December 2018 for payment system providers
in the hope that a model of e-money similar to those implemented in Africa would be
helpful. However, the initiative was a complete failure, and only a few private firms have
participated in the payment market without success.

With the introduction of a Central Bank Digital Currency in Venezuela, the public sector will
be able to issue a digital equivalent of cash that may be stored and transferred via the internet
or mobile application. Due to the lower costs of obtaining, storing, and spending digital
money, it may be more convenient for people to substitute banknotes for digital money and
may ease the difficulties that people without access to dollars are experiencing in making
transactions in an economy where most transactions are made in hard currency. Because of
these factors, the government should examine the feasibility of implementing an electronic
currency issued by the central bank, and this study would serve as a tool for that purpose.

1.8 In context: the Venezuelan economy during the last decades

Oil production is the main source of income for Venezuela's economy. This sector account
for more than 80 per cent of all exports, even though apart from oil, the country’s exports
include natural gas, iron ore, gold, bauxite, diamonds, and other minerals. Table 1. illustrates
the main characteristics of the Venezuelan exports of natural resources in the year 2021. The
defining feature of the Venezuelan economy is its heavy reliance on oil rents, evidence in the
high participation which has shaped its economic and social policies and influenced
considerably most of the macroeconomic outcomes in the country during the past decades.
The rentier nature of the Venezuelan economy means that its development and growth came
to depend on volatile economic activity (oil rents), which is subject to external factors that are
beyond its control, making the whole economy vulnerable (Palma, 2011). There is a
monopoly on oil production and distribution held by “Petroleos de Venezuela (PDVSA)”.

Table 1. Venezuelan economy features 2021

GDP at market prices (million $) 46,501

Value of exports (million $) 9,990

Value of petroleum exports (million $) 8,816

Proven crude oil reserves (million barrels) 303,468

Proven natural gas reserves (billion cu. m.) 5,541

Crude oil production (1,000 b/d) 636

Marketed production of natural gas (million cu. 23,720

m.)
Refinery capacity (1,000 b/cd) 2,276

Output of petroleum products (1,000 b/d) 232

Oil demand (1,000 b/d) 270

Crude oil exports (1,000 b/d) 448

Exports of petroleum products (1,000 b/d) 67

b/d (barrels per day)
cu. m. (cubic metres)
b/cd (barrels per calendar day)

Source. Organization of exporting oil countries

It can be seen in Figure 1, that over the years 2004-2008, oil windfalls and large fiscal
expenditures contributed to an impressive 10.5 percent growth in real GDP on average.
Consequently, the unemployment rate decreased from 18.2 percent (2003) to 7.4 percent
(2008). In terms of social indicators, they had improved as well: the poverty rate decreased
from 55.1 percent in 2003 to 27.5 percent in 2008, and the Gini coefficient decreased from
0.48 to 0.41. However, such an economic expansion could only last as long as oil prices
remained high. There has been a further increase in oil dependency due to a lack of industrial
policies that would diversify local productive capacity and continued weak private
investment the private sector contributed only 9.8 percent to GDP in 2008, according to
World Bank data (Kuleska, 2017). As a result, domestic growth was increasingly constrained
by world oil demand.

Figure 1. Percentual Variation of Venezuelan real GDP 1997-2017

25.0%

18.3% 20.0%

15.0%
9.9%
8.8% 10.0%
10.3%
5.3% 5.6%
3.7%3.4% 4.2% 5.0%
0.3% 1.3%
0.0%
-1.5%
-3.2% -6.2% -5.0%
-7.8% -3.9%
-6.0%
-8.9% -10.0%

-15.7%
-15.0%

-17.0%
-20.0%

Source: BCV and authors computations

Exchange rate controls led to an overvaluation of the bolivar, resulting in a massive increase
in imports from $8.3 billion in 2003 to $45.1 billion in 2008. Imports growing so
dramatically required careful attention to external and internal balances, as well as a sizeable
stock of international reserves in case oil revenues declined (Lampa, 2016). As a result of
running a large current account surplus, reducing its public debt, and increasing its foreign
reserves, the Venezuelan government achieved all these objectives between 2007 and 2008.
Venezuela's GDP contracted 3.20% as oil prices declined from $129 per barrel in July 2008
to only $31 per barrel in December 2008 (Palma, 2011). As a result of the decline in oil
revenues almost 40% (Vera, 2015) and the almost total disappearance of the current account
surplus, which fell from 10.8 percent of GDP in 2008 to 0.2 percent in 2009, the government
slowed down its fiscal expenditure, which had increased by only 1.5 percent, to maintain
fiscal balance. In 2010, oil prices rebounded somewhat, but the recession persisted due to
falling exports (due to low world demand) and domestic consumption, as well as a lack of
expansive fiscal policy. While the economy recovered (GDP growth was 4.2 percent in 2011
and 5.6 percent in 2012), it was mainly due to an increase in oil prices. Venezuela entered an
economic and political spiral as oil prices plunged from over $100 per barrel in 2014 to under
$30 per barrel in early 2016. Since then, the situation has only gotten worse the real GDP has
decreased (Figure 1). The Venezuelan gross domestic product per capita has declined by 87%
over the past decade, dropping from $12,200 in 2011 to $1,540 in 2021, according to the
IMF, marking the first time in history when the average Venezuelan is poorer than the
average Haitian over the same period (Has Venezuela’s economy bottomed out?, 2022).
 Chapter 2: Literature Review
2.1 Introduction
Due to the lack of a substantial amount of literature on the idea of a Venezuelan central bank
virtual currency, this chapter aims to provide an overview of Marxist theories of money and
post-Keynesian approaches to inflation, hyperinflation and dollarisation. This section will
discuss two types of CBDCs and the policy goals that central banks seek with their
implementation, along with the key features that help to mitigate the risks associated with
these models of CBDCs. 

2.2 The Marxist theory of Money

During the late 1850s, Marx developed his theory with the understanding that money serves
an array of different functions and could be viewed as serving many different purposes. In
this theory, all commodities are comparable because they contain a certain amount of value,
which is derived from the amount of human work measured in units of socially necessary
labour. Gold embodies this value; it becomes money by acting as a universal measure of it. A
commodity's value when measured in money and estimated at its price is a purely ideal or
notional form, quite different from the actual physical form of the commodity. As a result,
money does not need to physically be present to serve as a measure of value. It can perform
this function in an imaginary or ideal manner (Ivanova 2013).

But money's role as a measure of value is inseparably linked to its role as a measure of price.
The unit of measurement is determined by a specified amount of gold. According to Marx,
gold serves as a measure of value only in the sense that it is a product of labour and, thus, has
the potential to fluctuate in value. Therefore, changes in commodity prices are either caused
by changes in their value, determined by the socially necessary labour required to produce
them, so if the productivity of labour increase prices reduce, or by changes in the value of the
money material (gold) (Ivanova, 2013). Since the productivity of the labour force is so low in
Venezuela as a whole, this can be traced to one of the causes of inflation in the country. A
key point to emphasize here is the difference between money as the universal equivalent of
commodities, a concept that arises out of the exchange, and money as a standard of price,
typically a conventional concept that implies legislation and state intervention.

As a mean of circulation, money performs its function in two forms: as "narrow" means of
circulation (mean of purchase) and as "broad" means of exchange, which include means of
payment (cf. Lapavitsas, 2000, 636, fn 3). As a means of purchase, money facilitates the
circulation of commodities. In Marx's theory, commodities enter circulation with a price, and
money has a value. The amount of the circulating medium depends on the total sum of the
commodity prices and the average velocity of money circulation. As opposed to the quantity
theory of money (QTM), which claims that changes in the quantity of money are responsible
for changes in the price of commodities, Marx advocated the anti-quantity theory, which
emphasizes hoarding and dishoarding as mechanisms for regulating the quantity of money
(Arnon, 1984; Lapavitsas, 2000). Marx argues that the QTM does not take into consideration
the first function of money, which is to measure value, or its third function, which is to be
used for hoarding and payment. Instead, it only considers money as a means of circulation
(Ivanova, 2013).

It is helpful to consider Marx's general position on paper money when discussing inflation. A
paper currency arises directly from the function of money as a medium of exchange. A forced
currency is created by the state by introducing paper with money names printed on it into
circulation. The movement of these money symbols is governed by the laws of monetary
circulation as long as their quantity is limited to the equivalent amount of gold. If paper
money exceeds its proper limit, apart from the possibility of universal discreditation, it will
represent within the world of commodities only the quantity of gold determined by its
inherent laws. When paper money represents twice the amount of gold available, it is as if
gold's function as a standard of price has been altered. As a result, the values previously
expressed by the price of £1 would now be expressed by the price of £2. When non-
convertible paper notes are introduced into circulation.

According to Lapavitsas (2000), the anti-quantity theory of money states that hoarding is no
longer able to control the quantity of the circulating medium since valueless fiat money does
not represent an adequate store of value. Because it can only be used for circulation, it must
remain in circulation. Thus, if the state forces an excessive amount of convertible paper
money into circulation, its exchange value can decline without limit, leading to inflation or
hyperinflation.

Marx distinguished between money as an ideal measure of value, in which the physical
material is of paramount importance, and money as a means of circulation, in which it is not
the material but its physical presence that is of paramount importance. The value of money
and the price of commodities are determined prior to their circulation. The depreciation of
paper notes resulting from an increase in their number does not signal an increase in the price
of all commodities caused by too much money chasing too few goods, as the QTM suggests,
rather it indicates a decline in the value of paper money, which serves only as a medium of
exchange (Ivanova, 2013). The modern capitalist economy is credit-based, which means that
credit money is widely used in both large and small transactions. Changes in the quantity of
money may be influenced by the expansion and contraction of credit, as well as by the
hoarding and dishoarding decisions of economic agents.

2.3 Inflation and hyperinflation According to Post Keynesian Theory

Charles, Bastian, and Marie, (2021) propose a typology of inflation regimes based on a
review of post-Keynesian and structuralist literature. In this paper, low, moderate, and high
inflation regimes, as well as hyperinflation regimes are discussed. Depending on the type of
regime, there are a number of characteristics associated with it. A key role played by workers
and capitalists is emphasized in all regimes, along with the importance of indexing wages to
domestic prices in the moderate and high inflation regimes, as well as the specific role played
on a short-term basis by widespread indexation in high inflation regimes. The occurrence of
hyperinflation is caused by inaccurate forecasts about exchange rate fluctuations and
rejection of domestic currencies as a result of false predictions. It should be noted that the
authors emphasize that the current fear of inflation is largely irrational. Several cost variables,
such as wage changes (Robinson, 1964), markups, and changes in exchange rates, need to be
understood to define the typology of inflation and its dynamics. In the post-Keynesian view,
firms set prices based on their costs, then add a markup. Capitalists' costs are heavily
influenced by wages, which makes wage changes an important factor in price changes. It is
important to note, however, that wages alone do not determine prices (Kuleska, 2017).

A low inflation regime results from a distributive conflict between workers and capitalists,
who make profits. During each bargaining period, workers negotiate the nominal wage for
the next period. As a result, firms set prices with the intention of achieving a price level in
accordance with their desired markup. The inflation rate is therefore determined by the gap
between the markup sought by firms and the real wage rate that workers attempt to obtain, as
well as by the bargaining power of workers and the market power of firms. In this regime, as
well as wage costs, there are other costs which can affect inflation, such as an increase in the
financial ones, an increase in the exchange rate, or an increase in the price of imported inputs
which can be a source of inflation. Increasing import commodity prices, for instance, can
cause a negative supply cost shock. As a result, firms will pass-through these cost increases
in domestic prices to maintain their profitability, lowering real wages. Workers would also
react to an increase in inflation by claiming higher nominal wages, logically.

Low inflation regimes cause inflation to rise relatively high due to the virulence of
distributive conflict. The transition from a low inflation regime to a moderate inflation regime
is possible through a supply shock (as in the case of the oil shocks of the 1970s for many
developed economies). In this regime, wage indexation is becoming increasingly
institutionalized. Inflation's inertia and distributive conflict continue to play a significant role
in inflation's path. Generally, indexation occurs in situations where bargaining power is
relatively high. In Pazos's analysis, nominal wages are readjusted on predetermined dates (by
indexation). Since prices of goods are adjusted continuously, real wages are immediately
affected by inflation, which leads to workers receiving more frequent nominal wage
adjustments (Pazos, 1972). Furthermore, shortening indexation intervals and increasing the
frequency of wage adjustments increase inflation.

Further changes occur in the high inflation regime: wages are now indexed on prices, as well
as a variety of other indexation mechanisms. During times of high inflation, contracts are
prevalent that are denominated in different units of account from the currency used in the
economy. This regime requires continuous publication of an index, as Carvalho (1992) points
out. Accordingly, he argues that "shorter adjustment periods require different types of indices
than price indices.". Generally, the new adjustment index is the dollar exchange rate. We may
observe indexation on exchange rates in periods of high inflation since no domestic price
index is available on a weekly or daily basis. Prices are calculated based on exchange rate
quotes.

As a result of high inflation, hyperinflation occurs, which signifies that the domestic currency
has been rejected. In an open economy, agents exchange domestic currency for foreign
currency. Based on a Keynesian approach, it also provides solid arguments against
hyperinflation: if a country's currency is destroyed, its monetary policy cannot be
autonomous. Furthermore, hyperinflation episodes are associated with shortages of goods,
rentier poverty, and a reduction in real wages, which, despite being indexed to inflation,
suffer from adjustment lags. Consequently, the profits of entrepreneurs, especially large
corporations, are the only ones that remain prosperous. The liquidity preference is evident
among agents: they wish to hold highly liquid assets with stable values. However, if the
domestic currency does not meet these conditions (as a result of a continuous depreciation in
its value or as a result of anticipations of depreciation in its value), agents will look for
substitutes. As explained by Davidson ([1982] 1992), the national currency is generally the
asset that is most liquid and most stable. It should be noted, however, that if a national
currency's value declines significantly relative to foreign currencies due to domestic inflation
or a depreciating exchange rate, other currencies may be a better choice for meeting liquidity
requirements. In cases of hyperinflation, capital controls may not be sufficient to prevent
demonetisation and the substitution of foreign currency for domestic currency. Consequently,
demonetising the economy (a dramatic decrease in the amount of money in the economy) is
an essential aspect of hyperinflation episodes.

As inflation accelerates in a high inflation regime, expectations become increasingly

important in determining wages and prices. Due to this, inflation rates and relative prices
become more volatile, causing agents to try realignments that further accelerate inflation
rates. Furthermore, as the nominal exchange rate becomes more important as a reference,
agents demand dollars as a means of storing value, which further devalues the nominal
exchange rate, thereby accelerating inflation rates. Accordingly, Bastos (2002), and Charles
and Marie (2016) noted, for example, that hyperinflation episodes usually occur in countries
with high levels of foreign debt. It is not surprising that policymakers promote exchange rate
devaluations as a means of generating trade surpluses because of the need to pay interest on
external debt.

2.4 Central Bank Virtual Currencies

The Bank for International Settlement (2018) define two different types of CBDC, one of
them is a universal payment instrument designed primarily for retail transactions, but also
available for much broader use. The other version has restricted access for wholesale
payment and settlement operations. Unlike cash, bank deposits, or private virtual currencies,
CBDC have specific features that make them unique. In some cases, this kind of money is
available 24/7; in others, it is only available during specific periods (such as the opening
hours of payment systems for high-value transactions). Alternatively, they may be available
permanently or for a limited time. Intraday creation, issuance, and redemption are possible,
for instance. Additionally, CBDCs can be designed to provide varying degrees of anonymity,
like private digital tokens. Anonymity vis-à-vis the central bank is fundamentally decided by
society, which must consider, among other things, money laundering, terrorism financing,
and privacy protection. An external agent, the central bank, a commercial bank, or a third
party can facilitate CBDC transfers peer-to-peer or via an intermediary.
In the BIS report also identified two different forms that a CBDC can adopt regardless the
type. Token-based money is verified when exchanged is a crucial difference between it and
account-based money. It is imperative that the payee can verify the validity of the payment
object with token-based money (or payment systems). As with cash, counterfeiting is an
issue, whereas, in the digital world, it is an issue of determining whether a token or "coin" is
genuine or not (electronic counterfeiting) and whether it has already been used. In contrast,
systems that rely on account money must be able to authenticate the account holder's identity.
Token-based systems rely on decentralized transactions to effectuate the transfer of the
tokens, while account-based systems rely on a central party that manages the accounts to
record credits and debits between them. In the case of central banks, cash is an example of
the former and reserves an example of the latter. A key concern is identity theft, which allows
perpetrators to transfer or withdraw money from accounts without permission. Identification
is needed to link payers and payees correctly and track their respective account histories.
Both account-based and asset-based CBDC tokens can pay interest (positive or negative), just
like other forms of central bank digital liabilities. To encourage or discourage demand for
CBDC, they may have an interest rate that is the same as an official rate or a different rate. If
an instrument serves as a store of value and pays (positive) interest, its attractiveness will
likely increase. The use of CBDC or the position in these currencies is often subject to
different quantitative limits or caps to prevent undesirable outcomes or guide the user in a
particular direction. CBDCs may not be as useful for wholesale payments as they are for
retail payments due to those limitations or caps. Systems based on non-anonymous accounts
appear more likely to allow such limits and caps on positions.

"Behind the Scenes of Central Bank Digital Currency" (Bossu, et al, 2022) analyses six
advanced CBDC projects by collaborating and exchanging with central banks based on
different criteria. The stages of an initiative range from being fully implemented to being
rejected. CBDC's projects from the Bahamas, China, Eastern Caribbean, Sweden, Uruguay,
and Canada were selected for the study. The authors discussed the different policy goals
behind CBDC, which differ based on the country's main economic characteristics. In addition
to increasing access to digital payments, CBDC could serve as a gateway to financial
inclusion. Central banks in most countries strive to facilitate payments among their
populations. Financial inclusion and access to payments are related but not the same. It is still
possible to face access to payment challenges even in countries with high financial inclusion
rates, such as Sweden. Private payment service providers might find extending their services
to all segments of the population less profitable than expected, and the decline in cash use
might exacerbate this problem. Therefore, some jurisdictions are exploring whether CBDCs
can facilitate or safeguard universal payment access. Operational costs are high in countries
where cash and checks are widely used. In some countries, digital payments are also
relatively expensive. In addition to being cheaper to operate, CBDC offers digital forms of
payment that can be used as a policy tool. Due to their non-profit nature, central banks may
be able to provide low-cost payments as a public good, subject to eventual cost recovery.

Additionally, the paper discussed ensuring monetary sovereignty, reducing illicit money use,
and increasing competition. Some aspects of cash make it attractive to illegal transactions
(such as tax evasion, money laundering, and terrorist financing), including anonymity and the
lack of an audit trail. CBDC might be able to reduce this problem. Concerning monetary
sovereignty, digital currencies might have a competitive advantage over older currencies. A
country's central bank can be diminished if a significant portion of its population adopts a
foreign digital currency, such as a global stablecoin, which could compromise its ability to
perform monetary policy. Furthermore, CBDC could potentially increase competition in a
country's payment sector in two ways: directly, by competing with existing forms of
payments; and indirectly if it were designed as a platform that private payment companies
could use. As a result, new firms offering payment services would face low entry barriers.

Table 2. Jurisdictions’ Stated Policy Goals of Central Bank Digital Currency

Financial Illicit Competitio

Country Access Efficiency Resilience Sovereignty
Inclusion use n
Bahamas x x x x x    
Canada x x x x
China x x x x x x
ECCU x x x
Sweden x x x x
Uruguay x x
Sources: IMF.            

On the other hand, the authors consider the features of a CBDC model. A number of features
are designed to avoid certain risks that have been discussed widely in the literature on this
topic, such as the effects on commercial banks. It has been committed by central banks not to
endanger financial stability and avoid any abrupt changes to the financial system structure.
The literature discusses the potential risks associated with the introduction of CBDC,
including crowding out banks and facilitating bank runs. Furthermore, the literature discusses
various methods for mitigating these risks, including limiting CBDC balances or taxing
CBDC purchases above a certain level. There is no interest paid on CBDC holdings in the
Bahamas, China, or the ECCU at present. The purpose in all three cases is to limit CBDC's
competition with bank deposits. In the absence of interest, CBDC can still be attractive as a
means of payment, even at the expense of its value as a store of value (savings instrument).
There could be a trade-off between limiting competition with bank deposits and ensuring that
monetary policy is effectively transmitted. If policy rates were lower, bank deposits would be
less attractive than CBDC deposits. CBDCs with interest rates consistently below policy rates
might be a solution. Several CBDC projects have discussed imposing fees on transactions
above a certain threshold, but none have implemented it.

CBDC's three active projects all have quantitative restrictions. As well as limiting
competition with bank deposits, the goal is to promote financial inclusion. To make
onboarding new users easier, CBDC allows small holdings without requiring proof of
identification or KYC procedures. Pilot programs may also be limited by limiting CBDC
balances. Both the number of users and the number of e-pesos each user could hold were
limited in Uruguay. It made the pilot easier to manage, while also lowering the risk of
disruptions and damage to the central bank's reputation. All three CBDC projects have
chosen the same method for dealing with the trade-off between anonymity and financial
inclusion (to foster financial inclusion, people must be identified). Wallets have been divided
into tiers based on threshold levels. The anonymity of those with lower thresholds is greater.
Due to this, CBDC can more easily be implemented in rural or disadvantaged areas where
virtual identification may be difficult.

During natural disasters and armed conflicts, it is crucial to be able to pay without being
connected to the main telecommunications network. Thus, offline capacity is critical to
disaster-prone or geopolitically tense areas. In practice, offline functionality has proven
challenging technologically. CBDCs are also designed to reduce the costs and inefficiencies
of cross-border payments, which are generally considered inefficient and costly. CBDCs are
primarily focused on domestic purposes, at least so far. However, CBDC is currently being
discussed as a potential cross-border payment method. The following main challenges had
hampered the cross-border use of CBDC: Technical interoperability: When CBDC was
developed, there was little coordination on technology and messaging standards, which could
make retrofitting it for cross-border use expensive and complex. Harmonization of laws and
regulations. All jurisdictions conduct their legal investigations according to their domestic
legal systems. However, the treatment of data and privacy, tax and payment laws, and capital
flow management measures may need some harmonization.
 Chapter 3: Inflation, hyperinflation, and dollarization in Venezuela
3.1 Introduction
There is a common belief that Venezuela's inflation is simply the result of the monetization of
the PDVZA's debt, which led to the printing of inorganic money. The Post-Keynesian theory
has proposed a typology of inflation which departs from a country with low inflation due to
distributive conflict between workers and capitalists, which determines the markup based on
profits and salaries. A developed economy could be represented in this model. However, the
post-Keynesian model depicts other factors that influence the level of prices, which led to
higher inflation. Therefore, the typology can be applied to underdeveloped economies. Latin
American countries have different economic structures, and most rely on natural resource
exports. In the case of Venezuela, the main export commodity is oil, so any negative external
shock affecting its price affects the whole economy and directly the exchange rate since this
is the primary source of foreign currency. In turn, this effect increases the cost of imported
inputs for production, which is passed onto the consumer by the capitalist. Using post-
Keynesian theory, the evolution of these variables is examined to analyse their influence on
Venezuelan inflation, alongside with the Dutch disease to explain the main structural feature
of the economy. In addition, the effects of US sanctions are studied and how they contributed
to hyperinflation that leads to the dollarization process.

3.2 The roots of inflation.

3.2.1 Oil dependence and Dutch disease

An abundant supply of natural resources can hinder economic growth, according to the theory
of "Dutch disease”, it has the effect of overvaluing the exchange rate of resource-abundant
countries, preventing structural change (industrial diversification) or causing premature
deindustrialisation, harming the prospects of stable and sustainable economic development.
As a result of resource-abundant countries' ability to export commodities that are not
reproducible by labour, the exchange rate tends to overvalue compared to the exchange rate
resulting from exporting manufactured goods that compete internationally (Kuleska, 2017).
Between 1870 and 1980, Bertola and Ocampo (2012, p. 29) reported that the income
elasticity of demand for exports was higher than the income elasticity of demand for imports
during different periods. Venezuela's economy became increasingly dependent on imports
during the 1980s and 2008s due to a significant increase in import elasticity. According to
Bresser-Pereira et al. (2014), chronic currency overvaluation adversely affected Venezuela's
productive structure and strengthened the balance of payment constraint. Lack of
competitiveness in non-oil sectors led to an increased reliance on imports, especially inputs of
production, which has made local production dependent on the availability of international
reserves, which limits the economy's capacity to import. As a result, any external shock that
can affect the exchange rate is translated into a rise in input production prices, directly
affecting the price level in the economy.

3.2.2 Evolution of the official and parallel exchange rate

The government announced exchange rate controls in 2003 as a temporary measure in order
to prevent capital flight, as well as to support the local currency from falling. However, over
the course of 15 years, the government tightly regulated foreign exchange, which resulted in a
massive black market and fraud schemes involving public funds. Only in August 2018 were
currency controls eased for the first time. There have been several exchange schemes since
Hugo Chávez took office in 1998. From the 1980s and 1990s, the Central Bank of Venezuela
(BCV) played a central role, either by controlling the free price of the bolivar or by imposing
capital controls. A single official fixed exchange rate was implemented in February 2003, and
a Commission for Foreign Currency Administration (Comision de Administración de Divisas
or CADIVI) was established to administer it. As a result of exports and other sources, such as
tourism or remittances, all foreign currency earned had to be sold to the central bank at
official exchange rates. In contrast, the foreign currency could only be obtained at the official
exchange rate for imports and debt servicing under the commission's approval (Palma, 2008).
To meet the growing demand for foreign currencies, a parallel market was created where
supply and demand determined the exchange rate. Foreign currency could be obtained in this
parallel market by exchanging bolivar-denominated securities for dollar-denominated bonds,
which were later sold on international markets. Until 2010, the parallel market provided
legally available foreign currency. However, capital controls began to show their
deficiencies. On the one hand, agents sold their foreign currency on the black market without
following official procedures. On the other hand, opacity in the allocation of foreign currency
and subsequent accountability have made it possible for multimillionaire fraud and capital
flight to occur (Lander 2016). A series of allegations of corruption within the Government
followed, irrespective of the institution responsible for the allocation or the method by which
the exchange rate was set (CADIVI, CENCOEX; DIPRO, DICOM...). The Government
began to gradually devalue the official exchange rate and has almost completely liberalized it
since March 2019.
 3.2.3 The monetization of PDVSA’s debt
PDVSA has expanded its functions to become a parallel state that provides a wide range of
services to the country through "missions" that include education, health, pensions, food
distribution, and sports associations. Therefore, the country places a great deal of importance
on every aspect of this company. During the Chávez administration, oil prices were protected
by reducing production, so the company reduced the millions of barrel of oil produced daily
from 3,5 (before its administration) to 3 mbd. After the USA sanctions the production
plummeted to 500.000 barrels produced daily.

PDVSA, the state-owned oil company, has borne a significant portion of the external debt
since 2010. (Figure 2). The government's social spending programmes are contributing to the
growing debt of the oil company. It has been reported by Vera (2015) that the government
has used the state-owned oil company to finance social development programs, food imports,
infrastructure programs, and presidential campaigns. Further, PDVSA was used by the
government to finance its budget deficit by borrowing on the bond market through its
American subsidiary Citgo Holding, which has access to lower borrowing rates (Albert and
Jude, 2016). Consequently, PDVSA's finances have been negatively impacted, and
underinvestment has further worsened its debt due to social spending and low oil prices.
PDVSA also benefited from a law passed in 2009 that allowed the central bank to purchase
its bonds, enabling it to close its financing gap in local currency (Vera, 2015). Vera reports
that this increased the Venezuelan economy's monetary base (Figure 9).

Figure 2. PDVSA’s debt in millions of dollars

19,306
2000 18,543
19,474
2002 18,875
20,579
2004 21,120
25,528
2006 21,438
29,813
2008 32,367
43,633
2010 49,652
64,414
2012 67,614
64,661
2014 70,847
66,074
2016 68,021
68,728
2018 52,724

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

Source: Bloomberg/Oficina Nacional de Crédito Publico/PDVSA/Torino Consultores

Meanwhile, gasoline is practically given away in the country. It must be mentioned that
PDVSA does not have a steady source of income in bolivars to cover the significant expenses
they incur due to their numerous functions. However, in return for the exported oil, it has
access to dollars that companies and other agents need to pay for their imports and other
overseas operations. A sustained overvaluation of the bolivar and a decrease in foreign
exchange inflows following the sharp drop in oil prices in 2018 resulted in longer queues at
the central bank for dollars. PDVSA's accounts were affected by such dynamics. PDVSA
could not cover its expenditures with the few bolivars it exchanged for dollars. Through
monetary issuing, BCV has provided the technical solution to PDVSA's internal cost gap
since 2010, providing credit to this companies and popping more bolivars into the economy.
The public company has become increasingly ruinous due to this type of financing. Aside
from the lack of income the company used to obtain from the subsidy given to purchase
gasoline, the increasing indebtedness it experienced in bolivars with the BCV and dollars
with the rest of the world have contributed to the situation. From 2007 to 2014, the
company's consolidated debt passed from 1.6 to 46 billion dollars (Barredo, 2019). The
exchange mechanism and the creation of

3.3 The dynamic of wages

As a result of the neoliberal adjustments of the previous decade, workers' bargaining power
was already weakened. Still, high unemployment rates (from 13.4% in 2001 to 18.2% in
2003) also negatively affected their bargaining power. Real wages fell in 2002 and 2003 due
to the nominal wage increases workers could negotiate, which were below average consumer
inflation rates (Kuleska, 2019).

Exchange controls and the depreciation of the currency in 2002 threatened the distribution of
profits and wages. Consequently, real wages dropped from 38.2% in 2001 to 33.3% in 2003,
and inflation accelerated to 31.1% in 2003, compared to 12.5% in 2001. Moreover, the
inflation rate dropped significantly between 2003 and 2007, despite real wages increasing
during this period, suggesting that aspiration gaps between workers and firms decreased as
firms accepted lower mark-ups during the economic boom. Inflation between 2010 and 2012
appears to have been driven by the distributive conflict between workers and capitalists,
highlighted by the post-Keynesian inflation model. A growing distributive conflict is evident
in the increase in labour disputes between 2008 and 2011, which quadrupled from 400 to
1800 per year (The Economist, 2014). Since 2005, as the wage share has increased, workers'
bargaining power has grown due to the dramatic real wage declines during the 2002-2003
crisis (Kuleska, 2019).

Since 2010, workers' bargaining power has increased due to the relatively low unemployment
rate (from 8.5% in 2010 to 6.7% in 2014) and falling informal sector employment rates.
Workers' wage targets also increased due to social spending, which grew from 58.4 to 70.8
per cent of public expenditure between 2005 and 2012, primarily due to social security
spending growth. The workers could demand higher wages because unemployment benefits
increased their bargaining power.

During 2013-2019, real wages decreased by 95%, even though nominal wages increased by
up to 49 million percent, while purchasing power decreased by 80% during that same period.
There has been an unprecedented destruction of salaries in America Latina. (Sutherland,
2019). Maduro has institutionalized the constant rise of salaries. The first year of his
government, it was change twice. In 2014 Maduro ordered three salary increases. The first in
January 2014, when the salary rose to 3,270 bolivars. The second in May of that year, when it
was raised to 4,251 bolivars; and the last one in December 2014, the month in which the
salary reached the amount of 4,889, 11 strong bolivars. In February 2015, the salary was
raised to the sum of 5,622.48 bolivars. In May of that year, at 6,746, 98 bolivars. Two months
later, in July 2015, the salary reaches the sum of 7,421.68 bolivars; and in November 2015,
the figure for the minimum wage amounted to 9,648.18 bolivars. During the years 2015 and
2016, the salary was increased three times again. In 2017, the salary changed five times, and
the successive years. however, beyond being considered a positive or effective measure,
national public opinion viewed the adjustments with resentment, considering that they
contributed more to inflation than to improving their purchasing power (Poderopedia, 2022).

3.4 The USA sanctions.

Financial sanctions imposed by President Donald Trump in 2017 on Venezuela, restrict the
Venezuelan government's access to the United States debt and equity markets. The
Venezuelan government's issuance and use of digital currency and the purchase of
Venezuelan debt are also prohibited. In 2018 The United States blocked the country's assets
and prohibited certain transactions with anyone operating in the gold sector or involved in
deceptive practices or corruption. United States individuals and companies are banned from
engaging in transactions with the Maduro government in 2019, particularly with PDVSA and
third-country parties who engage in these transactions. As a result of the sanctions imposed
on PDVSA, pre-existing domestic problems related to governance deficiencies have been
exacerbated. PDVSA-managed oil fields were first affected by financial sanctions, and later,
Venezuelan oil exports to the United States were sharply cut by the oil trade embargo.

Rodriguez (2019) argues that PDVSA and the Venezuelan treasury were prevented from
rescheduling debt because of financial sanctions in 2017. According to the author, financial
sanctions resulted in economic losses of USD 16.9 billion per year. Apart from the loss of
revenue from 2017 onward, the trade restrictions imposed in 2019 increased Venezuela's
burden since the United States market was closed to Venezuelan products. It has not been
able to replace the over 400 thousand bpd that the United States market represented through
selling its oil to India or other international customers. Figure 3 shows how from 2017
onwards oil production started a rapid fall. Venezuelan oil production remained around 400
thousand bpd, threatening the country's status as a net oil exporter. As PDVSA is the primary
source of dollars, the reduction in production has aggravated the already precarious situation
of the economy by having an adverse effect on the company's debt and the lack of foreign
currency in the economy, which affected the exchange rate and the important component of
imported production inputs.

Figure 3. PDVSA crude oil production in mbd

3.0

2.5 2.35 2.38 2.37

2.06
2.0 1.92

1.77
1.5 1.35

1.19
1.0
0.73

0.5 0.41

0.36

0.0

Sources: OPEC

Bull and Rosales (2020) assert that the state has eased or stopped enforcing laws and
regulations to benefit from the inflow of funds and has increased taxes on economic sectors
in order to compensate for the loss of revenue. The informalization of the economy has been
further facilitated by private companies. Smuggling, illegal gold mining, and cryptocurrency
mining have also been facilitated by this phenomenon.

3.5 Evolution of Inflation, Hyperinflation, and dollarization in Venezuela

It can be seen from figure 4 that Venezuelan inflation remained two digits from 1998 to 2012,
which seems to be a structural feature of the economy. It reached a maximum value of 35.8 in
1998. During such a period, inflation rates remained stable at around 20% for the last five
years. The annual variation, however, started exceeding 20% in 2013.

Figure 4. Venezuelans’ annual inflation rate

1,000,000.0

130,060.2
100,000.0

9,585.5
10,000.0
2,959.8

1,000.0 686.4
274.4
255.0
121.7
100.0 62.2
35.8 40.6
31.1 31.4 27.1 28.2 26.1
23.6 22.4 21.8 21.1
16.2 16.0 13.7 18.7
12.5
10.0
8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1
99 99 00 00 00 00 00 00 00 00 00 00 01 01 01 01 01 01 01 01 01 01 02 02
1, 1, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2,

Source. BCV and author’s computation

In 2016, the CPI reached three digits, reaching 130.060% in 2018, marking the change from
the high inflation regime to the hyperinflation regime (Figure 4). Based on the post-
Keynesian typology of inflation, when the domestic currency does not have a stable value,
because of continuous depreciation and expectation of higher depreciation, agents will seek
substitutes. To meet liquidity requirements, currencies may be a better choice. In the case of
Venezuela, the dollar is the most important substitute for bolivars. However, the dollarization
of this country is not official, and the dollar is used mainly for payment transaction (in 2020,
according to independent firms, 65% of payment transaction were made in dollars), raising
the question of where the money comes from. Despite the government's recent approval of
dollar accounts, these accounts do not pay interest, there is no credit in dollars, and citizens
cannot even have debit cards.

There are no official statistics, therefore, studies must rely on different sources, as
independent analysis firms. A large part of the dollars that circulate are those that many
Venezuelans have been saving abroad for years.". The rate controls favoured this process
when the currency was overvalued. Many Venezuelans have bank accounts in US banks,
even though some are seeing their accounts cancelled due to fears they will be affected by US
sanctions. Electronic payment platforms such as Zelle have become increasingly popular
among citizens. Zelle is a method of sending funds between accounts in the United States
using a mobile phone, frequently used by Venezuelans to pay for daily necessities such as
food. As a result of this anomaly, most of the money moving the Venezuelan economy
circulates only through US financial institutions. In addition, it is also common to receive
dollars in cash in exchange for dollars transferred to foreign accounts. When Venezuelans
travel abroad, they often bring dollars from their accounts outside the country. (De dónde
salen los dólares que circulan en Venezuela - BBC News Mundo, 2022)

Sanctions imposed by the USA prevented companies from using regular channels. As a
result, they have used emerging financial tools such as informal dollarization. There has been
lifting or stopping of the state's enforcement of laws and regulations to benefit from the
inflow of funds. The government paved the way for the legalization of the dollar in 2018 by
removing economic sanctions and prison terms associated with unreported transactions.
Following the legalization of foreign currency by the Venezuelan government, many
businesses began accepting the dollar as a form of payment without fear of sanctions (Bull
&Rosales, 2020). Venezuela's informal dollarization has become a fertile ground for illegal
activities. When large amounts of cash are handled in dollars without being traced to the
financial system, drug traffickers and other criminals can enter a country with their money
without raising suspicion. Illegal money enters the country through the porous and conflicting
borders of the nation. According to organizations such as the International Crisis Group,
smuggling of gasoline, precious minerals, and other merchandise takes place along the border
areas with Colombia, Brazil. (De dónde salen los dólares que circulan en Venezuela - BBC
News Mundo, 2022)

Amid hyperinflation, many people prefer to use the dollar. However, the government has also
begun to restrict the use of bolivars in the economy. In 2019, the reserve requirement for the
banking sector was increased to 93%, and although it was reduced to 85% in 2022, these
levels remain excessive compared to international standards. (Impacto del Encaje Legal sobre
la banca - Finanzas Digital, 2022).

Recently, there has been a surprising improvement in Venezuela's economy after almost a
decade of contraction, hyperinflation, changes in the monetary cone, and dollarisation. In its
forecasts to July 2022, the International Monetary Fund estimated that Venezuela would
grow by 1.5%. The Economic Commission for Latin America and the Caribbean (ECLAC)
estimated it at 5%. There are, however, some questions raised by the numbers. Since 2019,
the Central Bank of Venezuela has not reported GDP data. Due to this, it is not possible to
contrast the information, compare the figures, or view indicators and economic performance
according to sector. Several factors have contributed to Venezuela's economic boom, most
notably a rise in oil prices. However, in August 2022, after a few weeks of the dollar's value
appearing to stabilize due to the new flow of dollars, it again dropped from 6.2 to 8,5 in less
than a week (El Debate, 2022). Since the expectation of depreciation remains present among
the population even though the economy has recovered, the dollarization has not reversed.
There is no sign of a recovery in the confidence in the currency and the preference for the
dollar will continue for some time to come.
 Chapter 4: Payment system and a CBDC in Venezuela
4.1 Introduction

Implementing a CBDC in Venezuela requires consideration of the experiences of countries with

similar socioeconomic characteristics. The availability of cash and the existing banking payment
systems in the country are also important factors since one of the objectives of implementing a CBDC
is to overcome cash-related problems and improve the efficiency of payment systems. This chapter
aims to briefly overview these factors as well as the evolution of PSPs, which provide electronic
money services that are competitors or substitutes for CBDCs. 

4.2 Advantages of CBDCs for emerging economies

A survey on CBDCs was conducted by the Bank for International Settlements (BIS) in 2019.
As a result of the research, they found that emerging economies have stronger motivations
than advanced economies to work on general-purpose CBDCs, i.e., as an alternative to cash
or as a complementary currency to cash, with the aim of increasing efficiency and security
when transacting. It is also important to increase the level of financial inclusion by improving
internal payments (in contrast, the most qualified objective for advanced economies was the
security of their payment infrastructures). In terms of financial stability, the respondents
consider it important but with a wide degree of dispersion, since the issuance of a digital
currency with the aim of avoiding banking crises would imply a profound reform of the
banking and payments sector. Thus, a successful CBDC should become a digital, resistant,
and inclusive complement to physical cash, which will be presented in the daily payment in a
similar way to banknotes and coins, constituting a liability of the respective central bank, and
would be present in the daily life of the community sustaining the economy. Additionally,
these digital currencies can further drive innovations that promote the efficiency,
convenience, and security of payment systems.

In a situation of high inflation, when the need for cash is high and the banking electronic
payment system cannot handle all transactions, CBDCs may be able to play a role in easing
the situation for the population. In Venezuela, one of the factors accelerating the dollarization
of payment transactions was the widespread power outages that became frequent during
March 2019. At that time, banknotes had limited purchasing power, so making payments by
credit card or bank transfer was necessary. Additionally, these payment methods were not
functioning properly. During the electricity shortage, people were forced to use dollars in
cash to make purchases at the retail level (La dolarización Venezolana, un salvavidas ante la
inflación, 2022).

4.3 Current situation of cash usage in Venezuela

It can be observed in figure 5, that in Venezuela, the currency with public have been reducing
and represented in the last five years, only 5.7% of M2. The reason for this is that natural and
legal persons have recently been able to make payment online. Figure 6 presents the
percentage distribution of transactions by banking means of payment, showing that 51.8% of
operations were conducted via the POS channel in Jun 2022. Second place goes to the
Interbank Mobile Payment (PMI) with 25.8%, followed by WEB with 15.9%. Branches and
ATMs had lower percentage participation, reflecting low cash usage. Similarly, low financial
education, trust in digital channels, cultural habits, and mobile connectivity have influenced a
greater maturity and strengthening of digital banking in Venezuela during the last few years,
especially in debit cards, electronic transfers, and interbank mobile payments. Regionally and
in border areas, as well as in public transport payments, there are still opportunities for
improving digital payments.

Figure 5. Share of currency in public in M2

Currency with public

12.3
11.4 11.1
10.3
9.9 9.9 9.6
9.1

7.7 7.4

5.7
5.5 5.4
4.5

2.2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

Source. BCV and author’s computatio

 Figure 6. Number of operations by banking means of payment

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
jun-21

ago-21

oct-21

nov-21

dic-21

mar-22

may-22
jul-21

sep-21

ene-22

feb-22

abr-22

jun-22
Source. BCV and author’s computation

4.4 Payment services providers in Venezuela

Due to hyperinflation, the country faced many limitations in the use of cash in 2018, and cash
was one of the most used retail payment instruments in the country. In addition, the number
of POS in stock was not sufficient to meet the demand for low-value payments, placing
pressure on other payment methods and electronic instruments, which were traditionally
offered solely by banks. In the context of migration from cash payments to electronic
payments, part of the population did not have access to the payment services offered by
banks, so they were unable to settle their transactions effectively (Venezuela prueba a la
fuerza aplicaciones para pago electrónico, 2018). The PSPs were created by the BCV to
diversify alternative electronic payment methods, especially for retailers, and support the
country's commercial activity. however, these companies were not allowed to work with
dollars legally, and after 2018, most payments were made in that currency. Only eleven PSPs
were authorized to work in Venezuela until 2022, according to information published on the
Central Bank of Venezuela website.
 Conclusions

 Venezuela's economy is characterized by its strong dependence on oil production. The

dynamic of the exportation of this product and the natural fluctuations associated with
it have affected economic activity and caused what is known as the Dutch disease.
The bolivar was overvalued during periods of high oil prices, which favoured the
importation of goods. As a result, not only did imported goods become more popular
but also most of the inputs for national production were imported, making it highly
dependent.
 Due to the predominance of oil in the economy, PDVSA became the main oil
company owned by the state and the key source of dollars in the economy. As a result,
all events related to this company may have an impact on the economy.
 The case of Venezuela can be explained by the typology of inflation and
hyperinflation described by post Keynesianism. Venezuela's inflation has been
influenced by factors such as wage and mark-up agreements between capitalists and
workers, as well as the depreciation of the currency. It is important to note, however,
that these factors are determined by oil prices since when they rise, the economy
improves and unemployment decreases, thereby improving workers' bargaining
power. As a result, producers increase general prices, causing inflation. Alternatively,
when oil prices fall, the bolivar depreciates, thereby increasing imported inputs and
increasing general prices.
 A reduction in revenues in dollars was caused by the USA sanctions against PDVSA.
This company serves as the government's instrument for financing its social programs
and other projects, and as a result of the decline in its revenues, the BCV began
financing its debts through credits in BS that later were injected into the economy.
Hyperinflation was a result of this process.
 Marxist theory of Money states that changes in commodity prices are caused by
changes in their value, determined by the socially necessary labour required to
produce them, thus if labour productivity increases, prices will decrease. The low
productivity of Venezuela's workforce could be a contributing factor to the country's
high inflation rates.
 In Venezuela, dollars back bolivars in the economy in international reserves held by
the central bank. Since the dollar serves as universal money, according to the Marxist
theory of money, when paper money represents twice as many dollars, it is as if
dollars have lost their function as a standard of price. Thus, the values previously
expressed by the price of Bs.1 would now be represented by the price of Bs.2 when
non-convertible paper notes are introduced into circulation.
 When this happens, hoarding can no longer control the quantity of the circulating
medium since valueless fiat money does not represent an adequate store of value;
because it can only be used for circulation, it must remain in circulation. Thus, if the
state forces an excessive amount of convertible paper money into circulation, its
exchange value can decline without limit, leading to inflation or hyperinflation.
Venezuela forced the issue of money through BCV credits to PDVSA.
 The process of substituting national currency for dollars has been a consequence of
hyperinflation. Venezuelans started saving in American banks years ago when the
bolivar was overvalued. Those savings are being used now to pay in Venezuela. In
this way, money is circulated outside of the country. Currently, 65% of all
transactions are conducted in dollars, and the process won't reverse until public
expectations of devaluations disappear.
 In Venezuela, a CDBC that serves as a substitute for cash is the model that fits the
economy. Savings do not earn interest in the banking system, so the CBDC should not
pay interest, since a bank run could destabilize the economy.
 Since the banking payment systems can handle bolivar transactions in the economy,
CBDCs do not contribute to the efficiency of payment systems. In regions without
banking services, it may have a marginal effect on improving cash availability (when
CBDC replaces cash). In this case, however, the technology needs to be able to work
offline since there is no good internet connection in the country.
 Venezuela's dollarization process will not be reversible until its structural problems
are resolved. While the public prefers foreign currency, CBDCs won't be accepted by
the public since they're just another version of the bolivar.
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