Government-Backed Cryptocurrencies in Unstable Petro-States
Many blockchain enthusiasts hope that frictionless transactions on online token economies can bolster personal freedom. Oil-rich nations, such as Venezuela and Iran, seek to use blockchain technology for a different purpose: to shore up their flailing economies in the face of increasing international pressure.
Venezuela has the world’s largest oil reserves. For years, Venezuela’s government used oil revenues to smooth over the effects of its economic mismanagement and its disregard for property rights. It appeased voters by subsidizing basic goods, to the extent that often, retail prices of such goods were lower than their production costs. But when the price of oil dropped from $100/bbl in 2014 to $50/bbl in 2015, Venezuela’s economy went into free fall. Today, Venezuela’s currency is worthless, its entire population is living in poverty, and people are fleeing the country in record numbers. Basic transactions in Venezuela require bags of money, and in 2017 alone, prices of goods jumped 2616%. In response to the Venezuelan government’s violations of human rights, the US put sanctions on Venezuela, hampering its ability to raise funds on international markets.
Earlier this year, Venezuela became the first country to introduce a government-recognized cryptocurrency. The oil-backed currency is known as “El Petro”. Since each Petro is supposedly backed by one barrel of oil, the currency’s introduction can be seen as an effort by the Venezuelan government to stabilize the economy in response to the sky-rocketing inflation of Venezuela’s national currency, the Bolivar.
The Petro was ‘launched’ in an ICO earlier this year. The government claimed to have pre-mined 2.7 billion coins for itself, and to have sold large amounts international investors, such as foreign governments. Venezuela’s president Nicolas Maduro claimed that the ICO raised $735 million in the first day of its presale. However, there is no evidence for this statement.
According to the Venezuelan government, the Petro was adopted to serve three purposes: to be a medium of exchange, to provide a digital platform to facilitate exchanges, and to be a savings and investment instrument. Maduro’s government claims to accept the Petro as payment for taxes, charges, and public services. In May, Maduro declared the country’s duty-free Margarita Island the first “special economic zone for the use of the Petro as a currency for purchases, for exchange within the free zone”.
The US imposed additional sanctions, prohibiting US citizens from purchasing any Venezuelan government-issued “digital currency, digital token, or digital coin” since January. Cryptocurrency rating sites have called the Petro a scam. Venezuela’s government has been vague about whether the Petro is Venezuela’s official currency, has not been able to provide a stable website to access information about it, and has generally lost credibility in the eyes of its citizens and the international community. This shows that government-backed cryptocurrency and blockchain efforts can only be as legitimate and trustworthy as the governments themselves.
Iran is another petro-state that has shown interest in creating a government-backed cryptocurrency.
Iran had been subject to various US sanctions since 1979, and a fresh round of US-led international sanctions in 2010 crippled Iran’s economy. In 2015, Iran and a group consisting of the P5 world powers and Germany entered into the Joint Comprehensive Plan of Action (JCPOA), a deal whereby Iran would curb its nuclear program in exchange for sanctions relief.
In 2017, Iran signaled a potential embrace of cryptocurrencies by preparing to allow Bitcoin transactions within Iran. In 2017, a deputy minister said that his ministry had “conducted a number of research studies as part of efforts to prepare the infrastructure to use bitcoin inside the country.” However, supposedly due to money laundering concerns, by April 2018 Iran’s central bank had prohibited the country’s commercial banks from dealing with cryptocurrencies and offering services to crypto firms.
Iran instead claims to have focused its efforts on creating a government-backed digital currency. The Iranian minister responsible for the government’s efforts has said that the bank ban “does not mean the prohibition or restriction of the use of the digital currency in domestic development”. He now claims that an experimental version of the currency is available.
The chairman of Iran’s economic commission once suggested that a government-backed cryptocurrency could serve to “facilitate economic deals and circumvent sanctions”. He was likely referring to oil exports, which have generally accounted for more than half of the Iranian government’s revenues.
In May, the US withdrew from the JCPOA and imposed harsh sanctions on Iran. The value of Iran’s national currency has since decreased significantly, and Iran has experienced capital flight. Additionally, the US has announced its intent to impose sanctions on any nation that does not cut Iranian oil imports to zero by November. However, Iran has not taken any recent steps to introduce its government-backed cryptocurrency.
Oil-rich nations feeling the bite of US sanctions have explored floating government-backed cryptocurrencies to stabilize their economies. Venezuela’s experience with the Petro suggests that this approach is unlikely to work. Iran’s slow progress in introducing a government-backed cryptocurrency can be seen as an acknowledgement of the ineffectiveness of such an approach.
Government-backed cryptocurrencies introduced with questionable motives during challenging economic times cannot be expected to engender trust. Since cryptocurrencies are based on trust, it is not difficult to see why such efforts are likely to fail.