Monday, November 23, 2020

Stablecoins as a route into Venezuela?


Over the last decade, few nations have experienced as much monetary and payments chaos as Venezuela has. Fans of bitcoin, Dash, and other cryptocurrencies have all tried to help by introducing Venezuelans to their preferred coin. But even with Venezuela's bolivar currency entering hyperinflation stage, cryptocurrency adoption never happened. 

Circle, a U.S.-based company that issues the stablecoin USDC, is the latest to join the Venezuelan crusade. Last week it belatedly announced that it had partnered with the opposition Guaidó government  to deliver financial aid to Venezuelan health care workers. Here is Circle's CEO, Jeremy Allaire:

In its blog post, Circle says it helped to get million of dollars to Venezuelans by leveraging "the power of USDC...to bypass the controls imposed by Maduro over the domestic financial system." Allaire suggests that in his tweet that stablecoins have now become a "tool of US foreign policy."

Did stablecoins play a vital role? I'm skeptical. If you pick through the transaction chain carefully, USDC's role was trivial. Nor does the wider claim made in Circle's post, that stablecoins have somehow arrived on the world stage as a foundational infrastructure in the future of the international monetary system, hold much water. 

For those who don't know, stablecoins are sort of like bank accounts with U.S. dollars in them, the difference being that they are hosted on a blockchain like Ethereum. Yes, they are a new and rapidly growing segment of the payments ecosystem. But if any payments instrument has helped Venezuela over the last few years, it's not stablecoins. Rather, it's the twin combination of old fashioned U.S. paper money and regular U.S. dollar bank accounts. More on that later.

A bit of background. The U.S. has declared the Maduro-led government to be illegitimate and thrown its support behind the Venezuelan opposition government led by Juan Guaidó. In 2019, U.S. officials cut off Maduro's access to Venezuela's U.S.-based bank accounts and put Guaidó in control. To give credence to the Guaidó opposition, an idea was hatched to take $19 million from these U.S. bank accounts and somehow airdrop it into the pockets of poorly paid Venezuelan health care workers. Each health care worker was to get $100 a month for three months.

Airtm, a money services business that offers U.S. dollar accounts, was recruited by the U.S. government to be the distribution agent for this $19 million airdrop. Airtm is a traditional e-wallet, much like PayPal or Skrill. People can get an Airtm account after going through a know-your-customer process, submitting ID and such. Having been approved, they can then transfer funds between their bank account or other wallets like Neteller. The money can also be spent using a virtual MasterCard debit card.

The first step in the Venezuelan campaign: move Guaidó's $19 million from his U.S. bank account to Airtm's U.S. bank account so that Airtm could distribute the funds. 

This is an easy step, right? It's just a US-to-US transfer, after all. Guaidó's bank simply initiates a wire transfer via Fedwire, the Federal Reserve's large value payment system, upon which the $19 million arrives in Airtm's U.S. bank account. It shouldn't take more than a few minutes. With that step out of the way, Airtm can now create $19 million in Airtm deposits for distribution to Venezuelan health care workers.

Instead, USDC stablecoins were substituted (either fully or partially) for Fedwire. Guaidó's bank bought $19 million in USDC stablecoin tokens (or maybe just a portion of that), and then sent these tokens to Airtm. Now Airtm could create $19 million in Airtm deposits for distribution.

By inserting itself into the US-leg of a transaction, Circle gets to make the claim that it was part of a stirring effort to bypass "censorship by the Maduro regime." But really, all it did was take the place of a very plain vanilla Federal Reserve transaction, one that never faced any obstacle anyways. The tough part isn't state-side, it's getting the fund to Venezuelans, In effect, USDC's role in this chain of transactions is superfluous (a point that Cas Piancey also makes here). Mind you, it certainly does make for good marketing.

Once Airtm had received the $19 million (via Fedwire or USDC), it could now embark on the tricky Venezuelan leg of the campaign. This involved signing up Venezuelan health care workers for Airtm accounts and then crediting their new account with U.S. dollar balances. (Nope, it didn't credit the workers with USDC. Airtm created internal database entries representing U.S. dollars for distribution to health care workers). From the sounds of it, this process didn't always go smoothly. The Maduro regime blocked Airtm's website, which meant that Venezuelans would have to use a VPN to connect. After talking to a number of medical workers, José Rafael Peña Gholam described the payouts as "somewhat chaotic."

I suspect this is why PayPal, which has much wider usage in Venezuela, probably opted out of the airdrop and let Airtm conduct it. PayPal didn't want to put its existing business at risk of being sanctioned or blocked by the Maduro government.  

If Airtm is to be the deployment vehicle for future Guaidó airdrops, it will have to refine its process. This isn't Airtm's first attempt to airdrop funds into Venezuela. Leigh Cuen chronicled an earlier attempt by Airtm to airdrop cryptocurrencies to Venezuelans for charity purposes. Only 57% of recipients ever engaged with the funds.

Now for my second criticism. The Circle press release describes Airtm's U.S. dollar accounts, or AirUSD, as a stablecoin-backed dollar token. And thus it can boldly claim that thanks to the combination of AirUSD and USDC, the world has just witnessed a "global first with use of stablecoins for foreign aid."

But Airtm's so-called stablecoins are not stablecoins. That is, U.S. dollars held at Airtm are not U.S. dollars held on a blockchain. Rather, they are very much like U.S. dollars held at PayPal or Skrill or Neteller. You know, good ol' fashioned centralized money. So for each Venezuelan that did succeed in connecting to Airtm to claim their dollars, they were getting non-blockchainy stuff.

So much for a "historic moment" in which "economic and political leaders have turned to stablecoins." USDC played a bit role, and AirUSD aren't stablecoins. 

That being said, stablecoins like USDC could be part of future relief programs. We'll have to see. One problem with using stablecoins for these sorts of airdrops is the massive customer due diligence requirements. The airdrop required vetting 60,000 Venezuelans to determine that each one was indeed who they claimed to be. But compared to e-wallets like PayPal and Airtm, stablecoins issuers have incredibly lax know-your-customer standards. Circle probably just doesn't have the staff to pull a carefully targeted airdrop off.

For now, no payments product has been more helpful for Venezuelans than classic U.S. paper dollars. So much U.S. currency has flooded into the country that it has effectively dollarized. An honourable mention goes to Arizona-based Zelle, a network that allows for instant transfers between U.S. bank accounts. Venezuelan retailers have adopted Zelle as an electronic payments method, although this surely goes against Zelle's terms of service:


I've written about Zelle usage in Venezuela before. Just as there is nothing blockchainy about paper dollars, there is nothing blockchainy about Zelle either.

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