Venezuela’s dollarization proposal gains traction as inflation tops 500%

Venezuela’s opposition is making its most serious push yet to officially kill the bolívar. A legislative proposal to formally adopt the US dollar as the country’s currency has been gaining momentum in Caracas, driven by an unlikely partnership between a Venezuelan lawmaker and one of America’s most vocal dollarization advocates.

The effort comes as annual inflation in the country has blown past 500% by private estimates, a number that sounds catastrophic until you remember Venezuela’s recent history makes it look almost like progress. The country experienced one of the worst hyperinflation episodes in modern history over the past decade, with peak rates that made the bolívar essentially worthless for everyday transactions.

The proposal and its architects

Opposition deputy Antonio Ecarri of the Alianza del Lápiz party has been working with Steve Hanke, the Johns Hopkins economist who has spent decades arguing that troubled economies should simply adopt the dollar and call it a day. Their proposed legislation would phase out the bolívar entirely, making the US dollar Venezuela’s official currency.

The framework is designed to preserve the central bank’s institutional autonomy while stripping away what Ecarri and Hanke view as the core problem: discretionary monetary policy.

In late August, the ruling Chavismo bloc moved swiftly to neutralize Ecarri. He was removed from the presidency of the Venezuela-United States Parliamentary Friendship Group and hit with a formal parliamentary investigation, all triggered by his public announcement of the dollarization initiative.

A country already running on dollars

The irony of the government’s resistance is that Venezuela has been functionally dollarized for years. Since roughly 2018, a process often described as de facto dollarization has taken hold across the economy. Vendors quote prices in dollars. Landlords collect rent in dollars. In Caracas shopping malls, the bolívar is technically accepted but practically an afterthought.

Alongside dollar usage, cryptocurrencies and stablecoins have carved out their own role in the country’s payment landscape, serving as alternatives for remittances and cross-border transactions in an economy where traditional banking infrastructure has eroded significantly.

Venezuela has attempted multiple currency overhauls over the years. The bolívar has been reconverted several times, with zeros lopped off the denomination. Venezuela underwent monetary conversions in 2008, 2018, and 2021, with the bolívar dropping nearly 100% in value over a five-year span.

The economic debate

Ecuador took this exact step in 2000, abandoning the sucre for the US dollar during its own severe economic crisis. The transition was painful but ultimately stabilized the economy, and Ecuador has maintained dollarization ever since. El Salvador similarly adopted the dollar in 2001.

Critics warn that formal dollarization would permanently surrender Venezuela’s monetary sovereignty, locking the country into whatever interest rate decisions the Federal Reserve makes for the US economy. There’s also the deflation risk: Venezuela’s economy is heavily dependent on oil exports, and without the ability to devalue its currency during commodity downturns, the country could face severe economic contractions with no monetary tools to respond.

For crypto markets specifically, a formal dollarization could reshape the digital asset landscape in Venezuela. Stablecoins like USDT have functioned as a parallel dollar system for millions of Venezuelans who couldn’t access physical greenbacks.

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