In December 2017, the government of Venezuela announced the development of a state-run cryptocurrency, the petro.
While the project does not embrace some tenants of blockchain-based cryptocurrencies, such as true decentralization and transparency, it has proven to be a captivating use case for how blockchain technology can be applied by governments as they grapple with legacy issues like international trade and national debt.
The Introduction of the Petro
The white paper for the petro claimed that blockchain technology allowed the clearest application of Hugo Chávez’s proposal to directly back the value of a national currency with the natural resources of that nation.
To this end, the Venezuelan government pre-mined the entire 2.7 billion coin supply of this currency for its initial coin offering (ICO), and it proposed a direct exchange rate of this cryptocurrency to Venezuelan reserves of crude oil.
The launch of the petro is, in this manner, breaking new ground into the practical applications of blockchain technology, as it is an experiment not only in corresponding the value of cryptocurrency with a material good and with an explicit use-value, but also in fielding a cryptocurrency as the result of a centralized state effort, breaking with the tendency toward a model of decentralization as advocated from the earliest days of Bitcoin.
Although nations such as Estonia have already begun experimenting with blockchain technology to accomplish various tasks, Venezuela is undertaking the first broadscale attempt to use blockchain technology (with Forbes reporting that the petro may be Ethereum-based or run on the NEM blockchain) to finance a staggering national debt. The successes and failures of the petro can, in these respects, be studied to influence the future implementation of these strategies.
Due to the relationship between U.S. sanctions and financial turmoil in Venezuela, the evasion of these sanctions is an integral component to the Venezuelan government’s strategy for the petro, and this strategy has attracted foreign interest, especially from Russia and China. The international geopolitics at play have significantly impacted the launch of the petro, with the U.S. government immediately banning U.S. citizens from purchasing it or furthering its development.
Nevertheless, the Venezuelan president who initially launched the petro, Nicolás Maduro, recently won re-election for his seat, so the first experiment with state-backed cryptocurrency will apparently continue to receive state support.
Private Domestic Mining
Venezuela is currently going through a period of hyperinflation, with the bolivar having lost 99.99 percent of its value in the last five years. As part of an attempt to stabilize the domestic economy, the government has instituted price controls on many basic necessities of life, notably including electricity.
The cheap availability of electricity as a result of these price controls has created a noteworthy amount of cryptocurrency mining within Venezuela, as those who can set up mining operations are able to effectively convert an essentially worthless currency into cryptocurrencies with an internationally recognized value. The government has responded to this new tendency by cracking down on privately owned cryptocurrency mining even as the state-owned mining operations gain attention and prominence, with the very legality of private mining itself seeming questionable.
In April, Venezuela began blocking the import of cryptocurrency mining equipment into the country, trying to disrupt this new trend of privately owned mining operations. The Venezuelan government’s friendliness toward a national cryptocurrency does not seem to have lessened its disdain toward private enterprise.
International Oil Trade
Showcasing the extent to which the petro is an attempt to use new technology to get liquid capital quickly, Venezuela recently offered the government of India a deal in which India would receive a 30 percent discount on all purchases of oil, provided that it conduct this transaction with petro instead of other currencies freely convertible on the foreign exchange market.
This move would directly contribute to the long-term viability of the petro, as it would give Venezuela a substantial new customer for the cryptocurrency and would provide skeptics with an example of Venezuela’s credibility to conduct international trades from a good-faith perspective.
Nevertheless, India appears uninterested in such a risky venture, even considering the potential windfall of this oil discount. Based on the state-run Venezuelan oil company’s previous truancy in honoring international debts with the state of India, there seems to be little confidence that a trade with this new and untested cryptocurrency will prove beneficial.
The Petro and the Future of Venezuelan Debt
Despite initial investments from overseas nations, the petro currently has shown an inability to function as the sort of international currency that the Venezuelan government desires. Although the blockchain platform itself lends a substantial amount of security to transactions, Venezuelan state companies do not have anywhere near this level of credibility.
As the petro moves forward as a possible solution to finance the Venezuelan government, potential investors in a “centralized cryptocurrency” should take note of the failures that the petro has faced in its first few months. The openly desperate attitude that Venezuela has displayed during this project combined with the subsequent crackdowns on domestic private operations have inspired little confidence in the petro’s potential as a serious currency.
Future attempts to finance the state through blockchain projects should recognize the role that the actions of Venezuela have had in undermining the reputation of an ostensibly secure platform.
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