Venezuela’s Cryptocurrency Is A Desperate Gimmick

Written by my colleague Dr. Win Thin

INTRODUCTION

Venezuela has issued the world’s first sovereign cryptocurrency. I think this is just a gimmick that cashes in on the current crypto craze, aims to circumvent existing sanctions, and avoids addressing the nation’s deep structural problems.  

INVESTMENT OUTLOOK

Venezuela launched an oil-backed cryptocurrency called the petro last week. The deal was first announced in December. Details remain sketchy, but (at least for now) a petro is meant to represent a claim of some sort on Venezuelan crude oil. President Maduro has at times said that the petro is backed by the country’s oil reserves, at other times that it reflects the price of a barrel of oil. However, there is no specific mechanism in place yet.

Maduro’s comments suggest that the value of a petro should somehow be determined as a combination of oil prices and credibility of the Venezuelan government. By definition, cryptocurrencies are decentralized and not dependent on some sort of authority like a central bank or government. By issuing a cryptocurrency that’s implicitly backed by a centralized entity, Venezuela is moving into a gray area.  

That this particular government has little credibility and can seemingly do no right simply compounds the problem. Last summer, the Maduro government started laying the groundwork and created the Superintendency of Cryptocurrency. A senior member of the constituent assembly was put in charge, despite having no experience with cryptocurrencies. Rather than building its own blockchain system to create the petro, officials decided to build within an existing network. However, there have been conflicting accounts as to whether its Ethereum or Nem.

The government put 38.4 mln petros on private pre-sale that runs through March 19. These will be sold with a series of increasingly smaller discounts in an effort to boost early demand. After that date, another 44 mln units will be sold in a public Initial Coin Offering (ICO). These units will also be sold with four increasingly smaller discounts for each 5 mln sold until the fifth and final tranche of 24 mln units is sold with no discount. 

A total of 100 mln units will be sold, with the government reserving the remaining 17.6 mln units. Officials say that no more petros will be created unless approved by the Superintendency for Cryptocurrency. The government believes Venezuelans will eventually be able to use the petro to make payments to government institutions, including tax payments. However, it appears that petros can only be purchased with USD. This makes the use of the petro as a medium of exchange for the local economy basically impossible.