Venezuelan Petro: An unfortunate start for government-backed cryptoccurrencies
Venezuela economy is in crisis almost for a decade now. Things started with internal political conflicts during the presidency of Hugo Chavez. The government adopted populist policies in order to increase its political power in the country and these policies led the country into hyperinflation, Venezuela started failing at payment of its debts and it snowballed. Country going into a crisis is not something new. On the other hand, how Venezuela tries to revive its economy is quite new, may be even unique.
Due to the crisis and hyperinflation came along with it Venezuela Peso suffered an extreme loss of value and the currency system collapsed. This led politicians to see alternative solutions. As a result, Venezuela launched Petro (PTR), the world’s first government-backed cryptocurrency. Indeed there were other attempts such as Estcoin, emCash, Crytporuble etc. However, probably due to the desperate need for an alternative payment system, Petro became the first one to be implemented.
What is Petro?
Petro is a raw material-backed, oil-baced to be more precise, cryptocurrency issued by the Venezuela government. It is a pre-mined cryptocurrency and there will be 100.000.000 Petros available in total. There will not be extraordinary issuances. 1 Petro is divisible by 100.000.000 units called “Mene”.
Venezuela government issued a whitepaper in which it explained its plans to promote Petro. Petro’s pre-sale started in February and allegedly attracted $735 Million on the first day. According to Nicolas Maduro, the Venezuelan President, Petro had raised $5 Billion by the time it went public in March. These figures caused caused some sources to report Petro as the largest ICO ever. However, it must be stated that theses numbers are controversial and there is no evidence so far.
Finally on 13 August, Maduro announced that Petro will start its circulation in the country on 20 August as the second official currency, which is novel but also bold movement considering the international scepticism towards government-backed cryptocurrencies.
The launch of Petra was criticised on both national and international level. Venezuelan parliament, run by the opposition, declared Petro illegal as it is a mortgage on the country’s oil reserves. Reuters reported that Jorge Millan, a Venezuelan legislator stated:
This is not a cryptocurrency, this is a forward sale of Venezuelan oil. It is tailor-made for corruption.
On 19 March, Trump has signed an executive order prohibiting the purchase of crypto tokens issued by or on behalf of the Venezuelan government by US citizens or by people in the US.
What could happen?
Venezuelan government advertises Petro as a way out to a stronger and more stable economy. What is the argument of the other parties? What are the risks and what could happen if something goes wrong? Could cryptocurrencies be a solution for countries whose currency is suffering from inflation?
First of all, it must be remembered that the value of cryptocurrencies is highly dependent on the credibility of the issuer. Furthermore, even a seemingly credible project might go awfully wrong as the DAO and NEM hacks showed us. Additionally, methods of compensation are not clear, if there is any, due to the distributed and cross-border nature of the underlying Blockchain technology. The fact that the issuer is a government, which led its own country to economic crisis and could not get approval of the national parliament, makes things even worse.
What are the specific risks associated with Petro?
This is a general problem with cryptocurrencies. It is assumed that the value of cryptocurrencies are extremely volatile due to the lack of central authority backing them. Accordingly, having a government backing a cryptocurrency would be considered as an element of stability rather than additional volatility. In case of Petro, however, the government backing it is a government allegedly involved with corruption and price manipulation.
Probably because of this unreliable image, the Venezuelan government, chose to peg the price of Petro not to its own credibility but to a barrel of Venezulean oil. Definitely much reliable than the government’s prestige but still not enough to prevent the wild volatility as the price of Venezuelan oil fluctuates as well.
Having a commodity backing a cryptocurrency would be meaningful if it had been possible to exchange the cryptocurrency with that commodity at will or there had been high level of circulation through which liquidation is possible. In Petro’s case, neither is possible.
2. Adoption and Circulation
The government might promote the usage of Petro in the country or even introduce laws to make people adopt it. However, the governmental is not sufficient for Petro to be adopted worldwide. Although the world of cryptocurrencies is decentralised, there are major exchanges through which people make their transactions and being listed on these exchanges is an informal requirement to increase the adoption. Currently Petro is not listed on any major exchange. Further, one of these major exchanges, BitFinex, explicitly refused to list Petro.
On the other hand, Venezuela increased the speed of certification of its own crypto-exchanges. In April, the government certified 16 exchanges and announced that this demand to exchanges is demonstration of confidence in Petro.
In short, buying or investing in Petro would mean investing in an asset that does not have real circulation in the crypto-world.
3. Money Laundering
Money laundering is one of the biggest concerns when it comes to cryptocurrencies. Unfortunately, the Venezuelan president Maduro and other political figures are considered risky with regards to money laundering. They do not promote transparency, they even do not provide evidence for the figures they announced regarding Petro’s offering. The government claims that it fights against the corruption for a long time now but the economic situation in the country does not make it easy to believe that these efforts are well-placed.
4.Circumvention of International Sanctions
This point is also related to the money laundering concerns. It is possible that the government might use Petro to circumvent international sanctions imposed on Venezuela. Actually, it might already have done so.
Petro was not accessible by Venezuelan citizens, people who are affected most from the economic crisis since only USD, EUR along with Bitcoin and Ethereum were accepted during the token sale.Hence the pre-sale of Petro was exclusively funded by foreign investors. However, such a fund flow from foreign investors would not be possible with conventional methods due to the international sanctions.
The use of cryptocurrencies by governments is a very novel topic and there is room for discussions, debates, pilot applications in the field. However, the use of non-stable crypto-assets to attract funds from foreign investors to an infamous government does not seem good, at least for now.
Petro sets a problematic example not only for its investors but also for the cryptocurrencies as whole.
Petro’s investors might profit or suffer losses, that is perfectly normal with a risk investment on cryptocurrencies. However, there is also the risk that Petro can be copied by other governments handling with economic problems and international sanctions.
Additionally, by their political nature, governments will advertise their projects as the best one out there. This is how politics work for a very very long time. Still, things get dangerous when this populism is combined with complex schemes and technologies that the general public could not easily understand and see through. This might result, firstly, the flow of funds to these dangerous or even illegitimate schemes and, secondly, the collapse of trust to the cryptocurrencies.
In light of all of this, Petro does not seem like a saviour but evil. However, only time will show how it will turn out.