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.

Finweek English Edition - - Contents - By Lloyd Gedye

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. ■ ed­i­to­rial@fin­week.co.za

Ni­colás Maduro Pres­i­dent of Venezuela

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