Venezuela discusses dollarization plan with private banks, according to report

Key facts:

A compensation system with US currency would start in 2021.

If the plan materializes, banks could offer loans in dollars.

Officials from the Central Bank of Venezuela (BCV) have met with representatives of at least five private banks to discuss what would be a dollarization of the financial system. The talks began weeks ago, according to a report published Monday by Bloomberg.

If the proposal materializes, the BCV would become a clearinghouse in dollars, which would lay the foundations for make instant transactions between different banks and offer loans in this foreign currency.

The initiative could come into effect in the middle of next year and would work in parallel with the official national currency, the bolivar. The information is unofficial since neither party has confirmed the meetings.

It is not clear whether representatives of the public banks have participated in the meetings or if the issue of United States sanctions has been considered during the meetings. The five largest banks in Venezuela, by market share, are: Banco de Venezuela (public), Banesco, Provincial, Mercantil and BOD, according to the Banca y Negocios website.

Currently some Venezuelan banks offer services related to foreign currency, however, the support is limited to cash deposits, withdrawals and transfers between clients of the same bank.

De facto dollarization in Venezuela

For Henkel García, director of the consulting firm Econometrica, the meetings between the BCV and the banks could explain the recent decision of the central bank to “stop any private initiative in this regard.”

The analyst placed the highlight on sanctions, saying that it is an issue to consider and that, in fact, due to that situation “there were banks that did not want to participate even under a private compensation scheme.

In October the BCV issued a circular prohibiting banks from paying for goods and services in foreign currency. In addition, the financial entity said that it had “not authorized any company to operate as a Non-Bank Provider of Payment Services in foreign currency.”

According to a study by the Econanalítica firm, almost 60% of operations in Venezuela are executed in dollars in cash, use of the Zelle application, international cards and bank transfers.

Venezuelans use more and more foreign currencies due to the precarious economic conditions, devaluation and hyperinflation that the country has lived for years. Another segment of the population has opted for cryptocurrencies like bitcoin to maintain the value of their funds.

A report by the firm Chainalysis, published by CriptoNoticias in September, indicated that the South American country is the third in the world in adoption of Bitcoin and cryptocurrencies. In its research, the New York-based company highlighted:

“Venezuela represents an excellent example of what drives the adoption of cryptocurrencies in developing countries and how citizens use it to mitigate economic instability.”