The Oil-backed Petro: Venezuela’s New Cryptocurrency
Everyone knows the hackneyed saying that money does not grow on trees. However, in the 21st century, money certainly does grow on the Internet.
For the first time in history, virtual currencies are a possible solution for economic crises. In December 2017, Venezuelan President Nicolás Maduro announced the creation of the petro, the first cryptocurrency ever issued by a country. Cryptocurrencies, a type of virtual currency that uses encryption to regulate transactions, are very similar to material money. The main differences are that all transactions occur on the Internet, the currency has no physical form, certain merchants or companies may refuse to accept the currency, and the currency is not regulated by a central bank.
Venezuela’s natural reserves determine the value of the petro. For example, the first 100 million petros issued by Maduro are oil-backed petros, which means that each one is equal to one barrel of Venezuelan oil. In the future, Maduro plans to issue petros backed by other reserves, such as gas or gold. His goal is to attract as many foreign investors as possible to buy and trade his cryptocurrency. Based on their latest price, if all 100 million of the petros currently issued were purchased, their total value would be about $6 billion. This large investment would have a powerful impact on the crippled Venezuelan economy.
The petro seems to be the ideal solution. The current currency, the bolívar, is nearly worthless due to hyperinflation. During Maduro’s presidency, oil prices plummeted from $100 to $50, drastically reducing Venezuela’s public revenue. With $140 billion in debt, the government’s attempts at printing more money to pay back its loans have only exacerbated the problem. In 2017, the inflation rate for the bolívar reached 2,400%, and experts project that it will rise to 13,000% by 2018. According to an interview between CNN and Alberto Ramos, an economist at Goldman Sachs who conducts research on Latin America, “the [Venezuelan] economy is really chaotic. It’s totally collapsed. It’s at the point of no return.”
A new currency could be a fresh start. In the first day of the petro presale, Venezuela raised $735 million for its coffers. During his announcement of the petro, Maduro claimed that the new currency will allow Venezuela to “advance in issues of monetary sovereignty, make financial transactions, and overcome the financial blockade.” The petro is a way for the Venezuelan government to raise revenue by enticing other countries to invest in and purchase the currency. By declaring that the petro is equal in value to one barrel of oil, the government can also profit from its oil reserves without actually extracting any oil. More importantly, the petro provides Venezuela with an opportunity to circumvent U.S. sanctions. During his administration, President Trump froze U.S. assets belonging to several Venezuelan government officials and banned U.S. companies from doing business with them. Maduro hopes that people around the world, including American citizens, will purchase petros and thereby aid the Venezuelan government.
However, despite the hype and frenzy surrounding virtual currency, there are also many complications. The legal implications of purchasing the petro continue to grow each day and the response from financial experts around the world with regards to the petro has been overwhelmingly negative.
When Maduro first launched the petro in December, his announcement generated a lot concern within the U.S. Department of the Treasury. The Department warned U.S. citizens that they would be put at “legal risk” if they chose to invest in the petro, because it diverges from the goals of the U.S. government. This warning turned into reality on March 20th, when Trump signed an executive order prohibiting U.S. citizens from buying the petro. Although Maduro hoped to bypass the American sanctions levied against Venezuela, he is now back to square one.
Additionally, investors are worried about the value of the petro. Commodity prices, in particular, are prone to extreme fluctuation. After all, the 50% drop in oil prices over the last few years is one of the main reasons behind Venezuela’s economic collapse. There is also no guarantee that the government will maintain the current exchange rate. According to a decree that outlines how the petro will work, the government maintains total control over the value of the currency. It may equal one barrel of oil or, as stated in article 4, “whatever commodities the nation decides”.
The Venezuelan government has a long history of shifty behavior when dealing with the economy. During his presidency, Maduro constantly overvalued the exchange rate of the Bolivar. As Venezuela’s debt grew, rather than decreasing spending, the government simply printed more and more money, which contributed to the inflation. Therefore, it is highly likely that the government will also betray their investors and reduce the value of the petro. The reliability of the Venezuelan government and the value of the petro remains questionable.
It is also doubtful that the average Venezuelan citizen will actually benefit from the petro, even though they are in desperate need for economic reform. Almost 90% of Venezuelans live in poverty; they lost on average about 19 pounds in weight last year, according to a national survey. Hungry mobs of people often band together to loot grocery stores. Despite the shortage of food and medical supplies in Venezuela, Maduro has refused to accept any foreign humanitarian aid. The suffering of Venezuelan citizens and appeals from the United Nations, the U.S., and other Latin American countries have not changed his mind. Therefore, it is unlikely that Maduro will use his new currency to resolve the humanitarian crisis. As of right now, the petro cannot be purchased with bolívars; they can only be bought with U.S. dollars, euros, and other virtual currencies like Bitcoin. The Venezuelan government has also imposed strict controls on the purchase of foreign currency. As a result, Venezuela’s own citizens are prevented from buying petros and profiting from the investment. The petro might be Maduro’s solution to Venezuela’s debt and inflation, but it does not directly improve the standard of living.
Although Maduro claims that the petro has raised $5 billion in revenue so far, the extreme criticism it has generated diminishes its potential. In the eyes of the U.S. government, the petro is a clear violation of U.S. sanctions and deserves no support. Furthermore, the value of the petro is unreliable, and there is very little guarantee from the government that investors will get their money back. If the public outcry over the petro continues, it is likely that more investors will lose faith in the innovative yet questionable solution to Venezuela’s economic crisis.
One of Venezuela’s biggest mistakes in the past was recklessly printing money when it should have curbed spending. It created money to replace the funds that it did not have. The creation of this new cryptocurrency seems to be an ominously similar solution. The petro is the first virtual currency ever issued by a nation, so it is difficult to predict its impact on the Venezuelan economy. Nevertheless, there are clear weaknesses in Maduro’s plan that must be addressed. Money can appear on the Internet, but that does not mean that it should.