Venezuela Launches the Petro
Introducing the Petro
When Bitcoin first emerged in January of 2009 there was an incredible amount of excitement surrounding its potential. The excitement was shared, but for many different individual reasons. On one end of the spectrum, you had excitement surrounding the peer to peer blockchain technology which eliminated any need for a trusted third party, allowing for truly decentralized transactions. While on the other end of the spectrum you have central banks along with policymakers who would love to reap the benefits of digital currencies underpinned by distributed ledgers, which would allow for an unprecedented amount of oversight on their currency, while simultaneously fearing the dangers of unregulated cryptos. The benefits and impacts of digital FIAT currencies are currently being researched and tested by various central banks and governments around the world including China, Sweden, Paraguay, the United Kingdom, Russia, Canada, Japan, the United States, and in Venezuela.
Venezuela has gone farther than any other country thus far in implementing a sovereign cryptocurrency. In an attempt to save his crumbling regime, Venezuelan president Nicholas Maduro has issued a presale of the Petro, an oil-backed cryptocurrency. No matter what angle you take, the Petro is a very interesting project. The Petro is built on top of NEM, (New Economy Movement) and is supposedly backed by five billion barrels of Venezuelan oil. It's illegal under the Venezuelan law to back any asset by a raw material that has not yet been extracted from the Earth, therefore it's a shady idea from the beginning, but President Maduro isn't afraid to bend or break the rules. Venezuela surely doesn't lack oil, in fact, Venezuela has the largest oil reserves out of any country in the world. To better understand the importance of this digital token from a geopolitical standpoint, we first have to know how this oil-rich ex-South American economic powerhouse finds itself in this desperate position.
Once the richest country in South America, Venezuela has come a long way from its heights of prosperity to find itself in its current troubling economic position. Venezuela is home to 17.6% of the world's entire oil reserves, 2% more than Saudi Arabia. Refer to the chart below to put everything into perspective.
From Riches to RagsVenezuela was once a country that was praised for fostering both a healthy democratic environment along with a booming economy but has since fallen to an oppressive socialist regime. Oil exports drove this country's economy forward, but a weakening global oil demand paired with excessive spending on socialist programs by former President Hugo Chavez has sent the country into a chaotic circumstance.
During times of high oil prices, Venezuela saw an influx of cash from their oil exports. To keep his people pleased, President Chavez spent lavishly on social programs, benefits, and subsidized both food and electricity. While this is a great short-term solution to a healthy society, it is anything but sustainable. Most countries whose economies are heavily dependent on oil use times of high prices to build up their foreign currency reserves to combat a decline in their own currency amid a slump in the price of crude. Countries such as Saudi Arabia, Qatar, and United Arab Emirates, all oil-rich countries, use times of high oil prices to also build up diversified portfolios and sovereign wealth funds as they know an oil-dependent world is not permanent. Venezuela neglected to make sustainability a priority for their economic agenda and they began to pay the price in 2014 when oil collapsed.
Oil Prices Throughout The Last 20 Years
Venezuelan GDP Last 20 Years (World Bank Data only goes to 2014)
Just with a quick glance at the two charts above highlighting both the price of crude along with the Venezuelan GDP, you can notice a stark correlation.
Maduro Goes CryptoIn addition to their tumbling economy, Venezuela's current president is doing whatever he can to keep his regime in power. The ruling party has even gone as far as rewriting their own constitution to ensure they remain in power. With all this disarray taking place, the country now has the fourth highest murder rate in the world with a rate of 45.1 murders per every 100,000 people and the ruling party has done little to contain or reverse this tragedy. The country has fostered a humanitarian crisis and now wants to negotiate with creditors to restructure its massive foreign debt of $150 billion. With US sanctions being implemented, the Maduro regime is keen to do whatever it takes to keep afloat financially as their foreign currency reserves near zero.
Venezuelan Foreign Exchange Reserves
The Petro cryptocurrency is aimed to help in the effort to boost their foreign reserves since the token is available for purchase in US dollars, Euros, Bitcoin, and Ethereum, which limits the ability of Venezuelan citizens to purchase Petro tokens since they are barred from purchasing other currencies to avoid capital outflow.
Pumping the Petro?
The mechanism which determines the price of the Petro is quite murky. The price is more or less dictated by the Venezuelan government's interpretation of their own oil prices, but essentially this means they can price it however they please. The official way the Petro white paper claims the Petro will be priced is found below. ↓
In response to the initial offering of the Petro, United States President Donald Trump has signed an executive order imposing new sanctions on Venezuela for the issuance of their controversial crypto. In a summarization the sanctions say "All transactions related to, provision of financing for, and other dealings in, by a United States person or within the United States, any digital currency, digital coin, or digital token, that was issued by, for, or on behalf of the Government of Venezuela on or after January 9, 2018, are prohibited as of the effective date of this order."
These sanctions make sense since the main purpose of the cryptocurrency seems to be so that the authoritative regime can circumvent their way past international sanctions in a desperate attempt to keep their political power. The opposition party in the Venezuelan government has also denounced the Petro, calling it both illegal and unconstitutional.
Will anyone buy?
Meanwhile, President Maduro has claimed the Petro has already raked in $5 billion, yet there is no proof to back this up. It is doubtful the sovereign crypto has collected even half of that amount. The NEM address believed to be holding all the funds is still showing no sort of movement. Shortly after the Petro went public Maduro then announced plans in a televised speech for an additional cryptocurrency that will be backed by Gold. It is questionable as to why anyone would want to buy into this crypto besides for speculatory reasons. Buying into the Petro is buying into the agenda of an authoritarian figure whose government has had over a hundred protestors killed, various military personnel imprisoned and is fine with watching his people starve as long as he can cling on to power.
There is an unconfirmed report that various Russian businessmen along with government officials have helped finance this token thus far.
In conclusion, it will take a while to see the true results of the Petro and if Maduro's claims about the amount it has raised are true or false. The overall launch of the token was generally disorganized and unconvincing. The white paper contained numerous grammatical errors, the website is not very clear on what the actual value of the token will be, and to store your Petro tokens you must have a Petro wallet, which I assume the Venezuelan government would have ultimate oversight on. It is highly unlikely the Petro will be successful in aiding the massive economic woes of Venezuela, but it is an immensely intriguing geopolitical move nonetheless. Using new financial technology of this level to meander around economic sanctions is something truly unprecedented in the modern age. Perhaps this may encourage other countries to issue their own sovereign cryptocurrencies to meet their various economic agendas.