Venezuela's cryptocurrency is a farce

Venezuela's cryptocurrency is a farce
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Tuesday, Venezuela launched the sale of the petro, a cryptocurrency allegedly backed by that country’s substantial oil reserves. This heavily indebted, if not bankrupt, country, known officially as the Bolivarian Republic of Venezuela, hopes to raise $4.9 billion, or more, from the initial sale of petros.

According to a Venezuelan political scientist, Francisco Toro, Venezuela “was turning to cryptocurrency out of ‘desperation’ because of its economic isolation from the United States.”

Toro continued: “They have been trying to figure out ways to get around anti-money laundering sanctions provisions, and crypto is maybe one way they can do that.”

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If nothing else, this desperate move illustrates the farcical nature of cryptocurrencies backed by nothing but thin air. As I have stated in previous articles, with cryptocurrencies there is no “there” there. That certainly will be true of the petro.

 

The specifics of this cryptocurrency offering are described in a 22-page “white paper” the Venezuelan government published on Jan. 30.

The paper states that the petro “will foster the emergence of a fairer, more collaborative global financial system that is conducive to growth, autonomy and trade among developing economies, primarily those based on raw materials.” This rationale, of course, is pure nonsense.

The launch of the petro will be a two-step process. A “Pre-sale” of the petro started on Tuesday. It consists of “the creation and sale of an ERC20 token on the blockchain Ethereum platform. This process will promote and guarantee demand for Petro’s Initial offering, which will be carried out later.”

At that later date, not yet specified, “Petro’s Initial Offer will be made later until [82,400,000] units available for sale are exhausted.” No rationale was given for this two-step process. Eventually, a total of 100 million petros could be sold, according to the white paper.

Based on a “reference selling price” of $60 (the approximate price of a barrel of Venezuelan crude oil), the sale of 82,400,000 petros would raise $4.94 billion. Whether Venezuela can sell all those petros, or even any of them, at that price, or at any price, is the multi-billion-dollar question. I, and many others, are highly, highly skeptical.

The white paper states that 45 percent of the amount raised would be spent on the Petro Project, ecosystem development and investments in “technology, infrastructure, special areas and projects that contribute to the country’s economic advancement.” What that would entail is anyone’s guess.

The other 55 percent of the funds raised would go into a “Sovereign Fund destined to the Republic for the support given to the use of Petro.” 

Translation: Every dollar raised by the sale of the petro would go into government coffers to be spent in whatever way the government wished. At least some of those dollars would be used to pay off some of Venezuela’s substantial foreign debt.

This likely use of the petro proceeds is why the U.S. Treasury Department has stated that buying petros could be seen as “an extension of credit to the Venezuelan government,” which could violate sanctions and expose U.S. citizens to “legal risks.” This warning is just one more reason why Americans will likely not be buying petros.

According to one news report, “Initially the petro will be sold in hard currency and other cryptocurrencies, not in the local bolivar currency.” That is hardly surprising given that Venezuela’s hyperinflation has rendered the bolivar essentially worthless.

That news report also noted something the white paper did not: Venezuela’s National Assembly, controlled by opponents of the current government, “has opposed the idea of the petro, labeling it illegal.” That does not bode well for the future of that cryptocurrency.

The petro does have a “legal tender” feature that appears to be unique among cryptocurrencies. According to the white paper, the Venezuelan government “will accept Petro’s [sic] as a form of payment of national taxes, fees, contributions and public services, taking as a reference the price of the barrel of Venezuelan [crude oil] of the previous day.”

However, there is a catch to this provision: The petros will be accepted at a discounted value of at least 10 percent. The discount could be much higher, if the government is selling freshly issued petros at a discount.

If Venezuela succeeds in launching the petro, other countries subject to sanctions, such as Russia, or nations with weak currencies may attempt to sell their version of a cryptocurrency. It is highly likely, though, that the petro will be a flop, discouraging other countries from trying to issue a cryptocurrency.

That flop would be very beneficial for another reason — it would highlight the absurdity of all cryptocurrencies, hopefully leading to their demise. The not-significant decline in cryptocurrency prices over the last 24 hours, as of noon, Eastern Time, Wednesday may be a step in that direction.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk. Prior articles by Ely on cryptocurrencies can be found here, here, here, here, here, here and here.