Maduro’s Desperate Crypto Bid

Venezuela has declared its “petro” a legitimate currency. But many of the government’s claims are unsound.

A sinking economy has left Venezuela grappling for a solution. The “petro” is not it.

Venezuela teeters on the brink of political and economic collapse. Since 2015, some two million citizens have fled. Every 25 days, prices double. Corruption extends into the farthest reaches of government, according to the Organized Crime and Corruption Reporting Project. President Nicolas Maduro, on Tuesday, unveiled an apparent solution.

The Venezuelan government has made its virtual currency, the petro, a “unit of account.” Doing this, the government claims, will ready it for use as a primary currency, alongside the upcoming bolivar soberano (sovereign bolivar). Starting August 20, state-owned businesses — including oil giant Petroleos de Venezuela (PDVSA) — will be mandated to accept it.

Tuesday’s announcement marks a decisive shift in the fate of the petro. Initially, it was launched in February as a “stablecoin” that could skirt U.S. sanctions and attract foreign investors. To remain stable, it would derive its value from Venezuela’s oil reserves. But it has since gathered dust. Now, state-owned oil giant Petroleos de Venezuela (PDVSA) is set to fully adopt it, and the government has approved it to back the bolivar soberano, touted as a healthier fiat alternative to its predecessor. The government claims it will also be used for salaries, and Maduro promises a resounding success. The president says public and private banks are already stocked with the currency and that it will soon bring about a “substantial improvement in the income of the workers.”

But some have called Maduro’s bluff.

Critics have questioned whether anyone even backs the coin. In April, the government gloated that the token had raised $735 million from 133 prominent backers, including China. Raul Gallegos — associate director at global risk consultancy firm Control Risks and former Venezuela correspondent for the Wall Street Journal — says this is dishonest, calling it a “made up currency.” Evidence of the purported 133 backers, for instance, can only be found in a one-off statement made by Carlos Vargas, deposed head of the National Cryptocurrency Treasury, which manages the supply of the coin. But his assertions went uncorroborated by the supposed counterparties. The only proof that the coin has backers at all is a TIME report in March that concluded the coin was a cynical diversion orchestrated by the Kremlin.

Gallegos, who advises foreign companies in Venezuela, says there’s scarcely a trace of the currency. “It’s not been widely adopted, no ones using it for transactions, certainly not businesses, nor foreign companies.” Looking at the online NEM blockchain, which accommodates transactions of the petro, suggests this is true: there have been 26 transactions since February, most of them zero (one such transfer cost a 3.25 fee in, er, petro). That doesn’t quite amount to $735 million worth. The plan to tether the petro to the new bolivar soberano, then, is suspect, says Gallegos. ”Pegging the price of a legitimate currency, the bolivar, to a made up one with a made up value, makes no sense.”

Untradeable

Real or not, investing in the petro could be ruinous. Foreign investors would quickly run afoul of sanctions imposed in March by the United States. The Trump administration declared that investing in the coin was an “extension of credit” to the Venezuelan government. The only sensible use of the currency, says Gallegos, is “money laundering.” The regime could, he says, channel the proceeds of state-sponsored criminals into petros, then convert them to bolivars.

Various ICO watchdogs have raised similar concerns. The ICO index has bluntly labeled it a “scam.” It says the petro is not a true cryptocurrency, controlled and managed as it is by the Venezuelan government, a centralized authority. Not quite Satoshi’s vision.

The opposition-run parliament, meanwhile, branded the petro “illegal” in January, taking issue with plans to match each petro with a $60-valued barrel of crude oil. This it described as a cynical “forward sale” of the country’s oil stock. Like an initial coin offering, it derives its value from a promise of future riches. But with the country’ oil reserves in a shambles, such promises are glib.

PDVSA, the state’s largest oil supplier, slipped into the hands of the military in late 2017. Since the takeover, severe mismanagement has caused a mass exodus of workers and a significant drop in oil yield. Oil-backed petros are unlikely to provide much ballast to the nascent currency, says Gallegos.

As for how the cryptocurrency will be tethered to oil reserves, those searching for answers in the petro’s whitepaper will come up short. The petro won’t relieve Venezuela from political and economic chaos. Rather, it will sustain it.