Venezuela Launches “Petro” Cryptocurrency: Can Internet Money Fix A Broken Economy?
Tension has been high since mid-May last year between the government and the opposition. Venezuela is split into the Chavistas, a name given to the followers of socialist policies of the late president Hugo Chavez and those who cannot wait to see an end to this long tenure of the socialists.
Chavistas had praises for the government due to them using Venezuela’s oil riches to markedly reduce inequality and for lifting many Venezuelans out of poverty. Oil accounts for about 95% of Venezuela’s export revenue and has been used to finance some of the government’s generous social programs which have according to figures, provided more than a million of Venezuelans with homes. They used to blame the opposition of being elitists and of exploiting the Venezuelans to increase their riches and have also alleged that they are in the pay of the US.
What Is The Problem Then?
It has been facing an economic crisis since 2012. In 2016, consumer prices rose 800% and hunger escalated to a point where surveys found that 75% of the population on an average had lost 8-9 kg due to lack of proper nutrition. The murder rate was 90 per 100,000 (as opposed to 5 per 100,000 in the US).
Reduction of health care spending and government corruption caused avoidable deaths and emigration of medical professionals to other countries. Venezuelan’s reliance on imported goods and its complicated exchange rates initiated under Hugo led to increasing shortages in essential medicines. Human Rights Watch once said that they had rarely seen access to essential medicine deteriorate as quickly as in Venezuela except in Warzones.
With the weak demand in many countries due to insipid economic growth, coupled with surging US production, the price of oil dropped which subsequently led to the reduction in the revenue generated by the Venezuelan government. This led the government to curtail its social programs. The surprise announcement made by Supreme Court on 29th March 2017 just added to the fire.
Petro Announcement
Around December 4th, on the annual televised Christmas message, Nicolas Maduro announced his plans for a new cryptocurrency amidst the economic crisis and plunge in the value of Bolivar. He said it would be backed by oil, gold and mineral reserves. This came weeks after it issued a new 100,000 Bolivar note.
It was considered a desperate bid to dodge strict US sanctions. The cryptocurrency, Petro, would keep transactions secure from outside parties – like foreign government looking to impose sanctions. Sanctions have been imposed last summer on key figures of Maduro’s government in response to its recent political power grab. It is struggling to make payments 120 billion $ worth of debt it owes to foreign lenders and bondholders many of whom are in the US.
Because of sanctions that restrict some Venezuelans government officials from using the US banking system, paying back the lenders can be difficult if not impossible. Petro could theoretically help them get around the restrictions.
The problem being they have to establish a formula by which a certain unit of the petro equals a certain % of the reserves. Maduro’s government suffers from corruptions and lack of transparency. There is no telling how they might adjust the formula to suit their needs. Trust comes hard if they have a habit of disregarding the law. It printed out too many Bolivars to finance its soaring budget deficits. The result of decades of mismanagement and terrible track record in economic policy, particularly in monetary policy has resulted in huge loss of trust.
On Jan 6th, Venezuela has ordered the release of 100 million units of new digital currency, the petro. It will be valued at the current value of oil around 60$. Petro is supported by one of several fields of so-called Orinoco oil belt, a vast reservoir of crude oil in the east. Most oil is priced and traded in US currency and the Venezuelan President Nicolas Maduro plans to change that.
The opposition has said that it won’t help the high inflation and the food shortage caused by mismanagement of the economy.
Government cryptocurrency is an oxymoron
They aren’t issued by an authority. They are decentralized and anonymous. It is a way of democratizing financial flows, without regard to the country or social stratum of the investor. Real crypto relies on network effects for their value.
The state-backed digital currency could make sense for a country if well regulated. India is also considering becoming a cashless society as it allows for more transparency and will not give the anonymity that paper cash has. But in the case of Venezuela, both the country and the state-owned Oil Company defaulted on their US dollar debt in November 2017. US Treasury Department has warned that the Venezuelan's proposal could violate sanctions which put many investors at bay.
Follow Up News
860,000 Venezuelans have registered with Venezuela’s new Registry of Crypto Miners, which is the only portal through which petro can be mined.
Venezuela’s government on Wednesday said online media had published “false information” about the petro cryptocurrency being proposed by President Nicolas Maduro. The statement did not specify what false information had been published or name specific media groups.
The opposition claims it is an effort to “illegally mortgage” the country’s oil reserves. Nevertheless, Maduro already pitched the cryptocurrency to Qatar in an attempt to gain the latter as an early investor. Maduro has urged a group of 10 South American nations to adopt it's soon to be launched Petro cryptocurrency.
On January 31st, Venezuela’s president Nicolás Maduro has announced the pre-sale of his country’s national oil-backed cryptocurrency, the petro. In addition, he has presented and signed the official petro’s whitepaper and unveiled the Petro Container for mining the new currency. The Whitepaper details “the functions, vision, and conditions”. The first sale of the petro will take place Feb. 20 and a number of "mining farms" are being developed at schools and universities.
The fact that the government can literally monitor every purchase, every account, every fiscal movement, and shut down access instantly slows the movement of its people into this crypto idea. At least cash offers some privacy.
Nonexistent reserves, hyperinflation, centralization, and the impossibility of actual redemption cause many to doubt its potential. What do you guys think? Will this hit off or just a way for the ruling government to make as much money as they can off the oil reserves amidst the economic crisis?