A South American Bitcoin? What We Learned About the "Virtual Sucre"

Foreign currency and exchange transactions have always presented challenging issues for doing business abroad. These issues become magnified in international markets affected by political and economic uncertainty and, in some cases, related government monetary policy.

This post explores whether virtual currencies, like the much talked about Bitcoin, stand to provide alternatives to foreign-exchange transactions or simply add more complexity.

My firm encountered this issue recently when a client came to us after having received a proposal to receive payment for a sale in Venezuela in a new type of “virtual” international currency, something called the “Sucre.” Naturally, this raised a series of questions from our client like what exactly is the Sucre anyway? how does it work? and is it like the Bitcoin? (which has been in the news a lot of late, including just this week when we learned that it is now accepted at Overstock.com, and two Las Vegas casinos!) (see here and here).

Here is what we found out.

First, since the Bitcoin has become the hot new form of digital currency (or at least the most talked about), we sought to get a better understanding of how it works in the hope that it could shed light on its possible South American counterpart. As it turns out, understanding the Bitcoin phenomena is a bit more involved than one might think as it involves considerable doses of finance, technology, and political philosophy. (see here for the under 2 minute video explanation and here for the longer 15 minute version from a recent investigative report on Canadian TV (report starts at 1:05)).

For our purposes, I offer this definition: the Bitcoin has become an online currency, unregulated by any country or central authority, that can be used to buy and trade in goods and services between buyers and sellers who have agreed that the Bitcoin has a measurable and acceptable value.

I say that the Bitcoin “has become an online currency” because its origins are cloaked in mystery (like, for example, the true identity of its creator, one “Satoshi Nakamoto” see here) which has led to active debate over whether the developers ever imagined or intended the concept to become the fascination of groups as diverse as wall street tech geeks, staunch libertarians, and, now, online discount shoppers and Las Vegas gamblers!

I must admit that, as I learned more about the Bitcoin, I found myself becoming captivated by its possibilities for international business transactions. If Bitcoins continue to grow in acceptance and remain unregulated by governments worldwide (as its advocates fervently predict), I imagined that it could pose an interesting, and perhaps powerful, solution to the risks associated with currency volatility (i.e., devaluation) and related regulations that are prevalent in international trade. If the Bitcoin were to become the new standard of currency accepted worldwide, one can imagine that a company in country A seeking to sell its products in country B could decide to accept Bitcoins as its preferred method of payment, thereby avoiding dealing in the foreign currency and its related exchange risks.

What Do Hugo Chavez and Satoshi Nakamoto Have in Common?

So I brought these ideas back to my client’s deal: could the Sucre share elements of the Bitcoin and might it offer a soluion to exchange risks?

The answer turns out to be mostly no.

What is the Sucre? The Sucre is indeed a sort of virtual currency that happens to be the brainchild of non-other than the late socialist Venezuelan president, Hugo Chavez. As recently reported by the Wall Street Journal, (see here) , the Sucre -- named after the 19th-century Venezuelan independence leader Antonio José de Sucre -- was developed to spur non-US Dollar commerce between private parties from some countries, like Ecuador, that are seeking to do business with Venezuelan firms (yes, Ecuador’s currency is the US Dollar which replaced its last hard currency, also called the Sucre, but we won’t get caught up in such details and ironies here). The new, virtual Sucre creates a legal alternative to trading in US Dollars by allowing the central banks of certain countries to convert local currency, like Bolivares, into a new currency as follows:

As the WSJ reports, however, while the Sucre may be a novel currency, it differs from the Bitcoin in almost every other relevant way. To begin, rather than being a purely private, unregulated form of exchange, the Sucre requires that commerce flow through central government banks. Buyers and sellers, rather than being free to trade on their own, must register their transaction with central authorities and, effectively, carry out their transaction in the currency of each country. No private entity ever uses or gets Sucres either, they continue to use their own currency, but they do so through a government-sanctioned process that avoids trading in a third currency, in this case, the US Dollar. The only “virtual” aspect of the Sucre appears to be that it avoids the step of requiring, say, an Ecuadorian seller of goods from having to accept payment in Venezuelan Bolivares and then convert the payment to US Dollars. In this sense, the foreign exchange still occurs, it is just facilitated by an intervening virtual transaction between central banks in Sucres. It seems that Hugo Chavez is no Satoshi Nakamoto, and that the countries that trade in the Sucre are not supporters of unregulated currencies ... quite the contrary.

Having debunked any illusions the Sucre might revolutionize international commerce, it is also true that the Sucre may, in the right circumstances, be a more efficient method of conducting foreign-exchange transactions with Venezuela. For example, if you have a business establishment in a Sucre-trading country, you may use the Sucre system as a way to minimize risks of attempting to convert Bolivares into safer currencies on your own. Indeed, judging from the number of businesses that have registered their transactions through the Sucre system, it seems that these efficiencies are being realized by more and more businesses.

Unfortunately, our research also revealed that the one feature that the Bitcoin and the Sucre unquestionably share is that both currencies have been targeted by criminal elements seeking either to avoid creating a money trail for illicit transactions (which Bitcoin critics cite as a major flaw) or make the money trail more efficient (as the Sucre seems to offer). Many observers, including this one, believe that this unintended consequence of both virtual currencies is likely to lead to increased vigilance and regulation.

In summary, our foray into the Bitcoin and Sucre worlds lead us to conclude that virtual currencies have a way to go before they revolutionize international commerce. While acceptance of the Bitcoin may appear to be gaining momentum worldwide, its rise is likely to be met with increased regulation by countries seeking to protect their own hard currencies and also fight illegal commerce. Also, if the Sucre is any indication, government-backed “virtual” currencies may start to appear on the scene, but they are likely to be designed to foster – not avoid -- trade in their own established, hard currencies.

In any case, international investors would be wise to monitor developments in all types of virtual currencies carefully and, if presented with such transactions, to entertain them only after deliberate study and an understanding of all potential risks.

For a printable PDF version, click here

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Andres Snaider is a founding partner of Nextant, a consulting firm specializing in assisting companies expand their businesses in international markets, with a strong focus on Latin America. With a degree in law and experience working as an international attorney and businessman, Mr. Snaider has advised clients on a range of commercial matters and investments across the Americas. He is a graduate of the Harvard Law School and currently lives and works in Boulder, Colorado.

Email Andres at : asnaider@nextant.com

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