Genius plan or political game?
Venezuela earlier this year became the first country to peg its fiat currency to a cryptocurrency. But the controversial scheme has been slated as a “fraud” perpetrated to alleviate US sanctions.
the world keeps on giving us firsts. Like the first national fiat currency to be pegged to a cryptocurrency. But for many in the cryptocurrency sector this is not playing out as they imagined. In February this year, Venezuela decided to peg its rebranded and devalued currency, the sovereign bolivar, to a new state-issued cryptocurrency called the petro.
According to news reports, Iran and Russia are also assessing similar possibilities.
Considering that the whole idea of cryptocurrencies on the blockchain was aimed at a decentralised financial system, the move towards state-controlled cryptocurrencies might be seen as a strange development.
But these three countries have something in common: They are all struggling with damaging sanctions imposed by the US. And that’s the elephant in the room when it comes to considering the latest developments in cryptocurrency-backed national currencies.
In Venezuela’s case, the aim of sanctions launched by the administration of US President Donald Trump last year is to stop the country from borrowing or selling assets in the US system.
But Venezuela has also been battling hyperinflation and declining oil production, both of which have pushed its economy to the brink of collapse.
The Venezuelan economy is set to shrink by around a fifth and many Venezuelans are pouring into neighbouring countries looking for a better life.
The International Monetary Fund (IMF) says the situation is not that far off from the one the Germans faced in 1923 or Zimbabweans in the 2000s.
Venezuelan president Nicolás Maduro believes that the new cryptocurrency will solve all these problems. He announced on television in mid-August that the Venezuelan government valued the petro at 3 600 sovereign bolivars.
According to various reports, Maduro claims that the petro is backed by about 1.5bn barrels worth of petroleum reserves which are in an isolated part of the country.
“They’ve dollarised our prices. I am petrolising salaries and petrolising prices,” Maduro told the Venezuelan nation on state television. “We are going to convert the petro into the reference that pegs the entire economy’s movements.”
Maduro claimed that the petro would impact how Venezuela traded with the rest of the world and how it got access to foreign currencies – in short, how it negated US sanctions.
But Reuters recently visited the site where the reserves are said to be located, and reported that there was no sign of the government tapping into those reserves. Regarding the cryptocurrency itself, Reuters also found “little evidence of a thriving petro trade. The coin is not sold on any major cryptocurrency exchange. No shops are known to accept it.”
It is fair to say that at this point the nation of Venezuela is in uncharted waters.
Venezuela insists that the petro is backed by the country’s oil and mineral reserves, but critics maintain that the details of how it works are thin on the ground. Some rating agencies have called it a “fraud”, while blockchain experts are calling it “a scam”.
US sanctions loom so large over the launch of the petro that it has been suggested that most of the major international crypto exchanges like Bitfinex, Coinbase, Bittrex and Kraken have chosen not to list the petro for fear of US retaliation.
According to a state White Paper on the petro, released in January, Venezuela has issued 100m petros based on the NEM blockchain. In February this year, Maduro’s administration launched the petro in a staggered offering to investors. First came a pre-sale to private investors to the tune of 38.4m petros, and second a public offering of 44m petros, with discounts offered to early buyers.
In March, Maduro announced that Venezuela had garnered some $5bn in offers from 133 countries including Russia, China, Colombia, Spain and Mexico.
By April, Maduro stated that the country had raised $3.3bn, with $1bn of this deposited in the country’s central bank reserves to be used for foreign exchange auctions.
Media reports have continued to debunk these claims.
A Reuters investigation quoted former Venezuelan oil minister Rafael Ramírez as saying that the petro was being set at an “arbitrary value”, which only existed in the “government’s imagination”.
Cabinet minister Hugbel Roa reportedly told Reuters that the technology behind the coin was still in development and that “nobody has been able to make use of the petro [...] nor have any resources been received”.
The world’s first cryptocurrency-backed national fiat currency may yet turn out to be a mere political game, being played at the expense of Venezuelan citizens.
However, it is important to remember, too, that US sanctions are no less a political game being played at the expense of Venezuela’s people. If the petro does turn out to be a giant scam, then we need to remind ourselves of the geo-political conditions that created it. ■ firstname.lastname@example.org
Nicolás Maduro President of Venezuela