Venezuela has been experiencing one of the great economic, political and social crises in recent times: Productive economic output has been cut by one-third in the last five years. Hyperinflation has led to the expropriation of savings held by the general population and financial chaos.
The visible plight of a once-wealthy nation has left onlookers wary and in search of answers to the immensely complicated questions brought about by this collapse.
On Tuesday, socialist leader Nicolas Maduro claimed to have raised $735 million toward the pre-sale of the "petro" — an oil-backed cryptocurrency launched by the Venezuelan government. Many see the petro as a thinly-veiled and illegal debt instrument for injecting hard-currency into Venezuela’s depleted foreign reserve coffers.
Indeed, Maduro has openly described the petro as a means around U.S. and European sanctions. Cash is desperately needed by Venezuela for spending on imported goods, payments on overdue sovereign bonds and to keep the government afloat.
Despite the petro’s ostensible early fundraising victory (no independent evidence has been presented to back-up Maduro’s claims), global confidence in this new digital asset is justifiably low.
Numerous warning signs — from the vague technical white paper to a last-minute switch from launching the petro on the ethereum network to Singaporean-based competitor NEM, along with claims that the oil backing the petro is yet to be pumped — have left both many in the cryptocurrency community and traditional financial investors skeptical of the petro’s prospects.
A surprising and perhaps nefarious embrace of cryptocurrency
Maduro touts his new cryptocurrency as his regime’s entry into the “new economy”. Ironically, a key component of the success of cryptocurrencies like bitcoin to date has arguably been their independence from the whims of political factions like Maduro’s PSUV party.
For months, it has been reported that the Venezuelan government has been hunting down cryptocurrency "miners" who run the computing equipment and networks that power cryptocurrencies like bitcoin. Miners are paid new bitcoins by the network in exchange for incurring the associated electricity and other costs.
Many upper and middle-class Venezuelans, who have the necessary capital to undertake cryptocurrency mining, have embraced bitcoin, ethereum, zcash and other decentralized digital alternative currencies to escape the tumbling bolivar, Venezuela’s national currency.
Though some speculate that the push to compile a registry of citizens willing to mine the petro is little more than a trap to snag these cryptocurrency miners (state-run media pegs their number at 860,000), it is possible that Maduro has indeed adopted the motto of, “If you can’t beat ‘em, join ‘em."
A successful Petro will boost Maduro’s political prospects
While the overall skepticism toward the petro is certainly understandable, its launch also raises a number of important questions, such as can the petro actually help the Venezuelan people?
A multitude of government decrees have begun the process of internal petro promotion: It and other cryptocurrencies will be accepted at all consular services, tourism operators, fueling stations and at the largest Venezuelan corporates, including PDVSA, the state-owned oil and natural gas company.
Regardless of the government’s support for the petro’s adoption and use or the true motivations behind the petro, this new cryptocurrency is unlikely to inspire the same faith as bitcoin, nor skyrocket in value.
However, Maduro is selling petros at a discount to the value of their underlying assets, meaning the petro may help Maduro accomplish the narrow purpose of raising $6 billion. (The price of an individual petro is intended to equal around $60/unit, or approximately the same price as a barrel of oil.)
If the petro succeeds in attracting investors, bond payments of $9 billion or more due in 2018 could see a greater likelihood of repayment. The April 22 snap presidential and legislative elections may also generate a temporary rush of renewed confidence in the ruling party given Maduro’s defiant introduction of the petro.
While it is theoretically possible that the economy and the average Venezuelan will actually see some benefit from a succesful introduction of the petro, it is far more likely that the primary beneficiary is Maduro’s near-term political prospects.
The petro further validates the significance of cryptocurrency
The launch of the petro raises other questions, such as how did cryptocurrencies make the jump from serving as an object of pure speculation and the tainted tool of cybercriminals to being embraced by a large nation state?
The answer to this question is complex, but the utility and resiliency shown by cryptocurrencies in the face of the many obstacles they have overcome in attracting millions of global users means they can no longer be simply dismissed. Indeed, the rise of cryptocurrency represents nothing short of a minor economic miracle.
For several years now, many central banks have been exploring introducing new digital currencies based on blockchain technology, the open source software and protocols that underpin cryptocurrencies like bitcoin.
Though state-sponsored cryptocurrencies rumored to be in the works (such as a Russian cryptoruble, or similar ideas in Sweden, Israel, Estonia and elsewhere) could potentially proceed in a similar fashion as the petro, it is far more likely that other state-backed cryptocurrencies will be launched on "permissioned" distributed ledgers rather than open blockchain networks like ethereum.
Central banks and other government institutions will be closely watching the petro. Whether or not Maduro’s cryptocurrency gambit succeeds, his actions highlight the growing significance of cryptocurrencies and blockchain technology in our world.
Garrick Hileman, Ph.D., is the CEO and head of research at Mosaic.io and a research associate at the University of Cambridge and London School of Economics. Andrew A. Hawley is a senior analyst at Mosaic.io, a decentralized platform incentivizing the creation of crypto-asset analysis.