Venezuela's Ill-Advised "Cryptocurrency" Scheme: An Update
Beset by political and economic crises, the Venezuelan government provided more details in early January about its plan to issue a new so-called cryptocurrency called the “petro,” which it hopes to use to avoid a financial meltdown. Venezuela’s plan is to raise up to $6 billion by issuing 100 million petros, which will supposedly be backed by the equivalent number of barrels of oil. It hopes to attract investors who have made a fortune in bitcoins by offering them a way to “diversify part of their risk” by “acquiring natural resources, real assets, without leaving the digital world.” An earlier post explains that the proposal is not in fact a cryptocurrency and that persistent mistrust and use of technical gimmicks will fail to solve Venezuela’s economic difficulties. This post covers newly disclosed aspects of the plan and the unanswered questions that remain.
The government's plan reveals misunderstandings about how blockchains work
The government document titled “The Petro Is Independence” describes the plan. It combines serious misunderstandings with wishful thinking about the benefits of blockchain technology, along with evidence that the government is either trying to fool its populace or that it does not understand the basics of cryptocurrencies, or both. The beginning of the document states that “cryptocurrencies…are free from financial speculation thanks to the blockchain. And automatically, it will be saving and protecting the bolívar from the parallel [black market for] dollars.”
But a blockchain is simply a way to record transactions. It bundles new transactions on a network like bitcoin into a block, which then is added onto the previous block of transactions to form a continuous chain. The benefit of a blockchain is that anyone who breaks the rules and/or tries to tamper with past transactions, for example trying to falsify a record that others transferred bitcoin to them, will break the chain, and thus be exposed. There is nothing inherent to blockchain technology that would prevent speculation.
Since the bolívar will not be backed by the petro, there is nothing to support the government’s claim that the introduction of its digital currency would stabilize the value of Venezuela’s fiat currency. Venezeula’s hyperinflation is the result of fiscal and monetary disarray, coupled with a complete breakdown of trust in the government’s ability to manage the economy. Cryptocurrency enthusiasts make many outlandish claims about the benefits of blockchain, but few would deny that feverish financial speculation is at the core of today’s cryptocurrency boom. Just like Venezuela’s bonds, the petro is likely to be a highly speculative investment if it is in fact issued.
Doubtful that use of the petro can circumvent US sanctions
The official document states upfront that launching the petro is motivated by the need to “face the sanctions of the hegemonic government of Donald Trump.” In theory, the petro would allow Venezuela to avoid the dollar and traditional payment systems and instead transact internationally in existing cryptocurrency platforms, thus potentially bypassing sanctions. However, the plan’s ability to do so is doubtful. The US Treasury has already declared that purchases of petros “would appear to be an extension of credit to the Venezuelan government…(and) could therefore expose U.S. persons to legal risk,” which means that any firms with connections to the US financial system, including most cryptocurrency exchanges, will think twice about dealing in petros. Since the document states that all transactions will be visible, arguments that the United States will not see sanctions being circumvented do not hold water. Blockchain ledgers tend to be public to allow anyone to verify that transactions do not break the chain. The same would hold true for transactions using the petro, if it operates according to the most common standards for cryptocurrencies/tokens.
The plan faces political and credibility problems
The proposed issuance also may create a politically thorny issue for the government. Reportedly, the plan will be like other offerings of new digital currencies, which sell the coins or tokens at a discount to big investors first, before they are available to the public (at a higher price). It will also allocate some of the petros to the government and advisors helping the government with the sale, a process rife with opportunities for corruption. To our knowledge, there is no recent precedent for governments issuing currency at discounts to favored groups of investors. Venezuelan citizens and government workers, who eventually may be paid in petros, are likely to perceive this move as an unfair, illegitimate payout.
Furthermore, credibility and legal certainty are central to the value of any digital asset supposedly backed by physical assets, but the government decree does not provide for the exchange of petros for actual oil. There are only vague promises that the resources backing each petro are equivalent to a barrel of oil or “other commodities the nation decides.” It only permits exchanges between the petro and the bolívar, or between the petro and other cryptocurrencies. Any “backing” will thus be tenuous at best. Indeed, the Venezuelan parliament has declared the scheme illegal and unconstitutional. Each source of uncertainty will likely depress the value investors are willing to pay for each petro, reducing the amount the government can raise and increasing the overall cost of the scheme, if it gets off the ground at all.
President Maduro’s government asserts that, thanks to new cryptocurrency technologies, Venezuela will no longer have to face the consequences of its macroeconomic mismanagement. But the petro is a cryptocurrency that isn’t, and economists have yet to discover a magical silver bullet to avert default and financial chaos when countries drive their economies into the ground.
1. In 2017, the price of bitcoin went from around $800 to just short of $20,000, then plummeted to around $10,000.