We need to heed warnings on digital currencies

Conditions are dire in Venezuela as people suffer from widespread food shortages. Living costs have skyrocketed and hyperinflation could hit 13,000 per cent this year, according to the International Monetary Fund. The currency, the Bolívar, has collapsed. Worse, Venezuela has been hit with sanctions, but the country is not trying to make amends or looking for concessions. Instead, it is looking to tap into its oil reserves and raise money through cryptocurrencies to tide over the economic crisis. It plans to raise $60 billion through the sale of 100 million ‘Petros’, the price of which is backed by the price of oil, to honour its financial commitments. The pre-sale of 38.4 million tokens, at $60, has reportedly attracted over $735 million on its first day. The sale is on until March 19. After that another 44 million will be offered through an initial coin offering. Petro is the first digital token whose pricing is linked to something substantial, in this case oil. It is clear with this development that the dynamics of cryptocurrency markets are changing.

Despite the crazy valuations that some digital currencies are commanding and the money that is being pumped into digital tokens, economists and experts sound caution. Many economists, including Nouriel Roubini, who was among the first ones to sound alarm bells on the sub-prime housing crisis in the US, and investment mogul Warren Buffet have gone on record saying that cryptos are nothing but a bubble. For all we know, Venezuela’s foray into this domain could end in failure. Or, it could be a game-changer. Digital currencies, for the first time through Petro, are being legitimised by the very institutions they were meant to shun. It would be worth watching how this experiment fares. Petro is Venezuela’s hope to circumvent the traditional system and attract global investors who are otherwise blocked from investing in the country because of international sanctions. If the experiment is successful other countries in crisis, or those facing sanctions, could float their own versions of cryptocurrency and raise money. And that doesn’t sound good for the global economy that cannot afford another downturn.