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Venezuela catches the crypto craze

Is "The Petro" a leap forward or just a cash grab?

Some might have seen how the wild-ride cryptocurrencies like bitcoin have lured investors in recent months and decided it prudent to steer clear of the crypto craze. Not Venezuela's President Nicolás Maduro, who has seen opportunity in the rise of digital currencies to raise funds for his cash-starved government.

In December, the president said Venezuela would mint the world's first oil-backed digital currency and call it The Petro. "For every Petro, a barrel of oil," Maduro explained in December, saying the new virtual currency, available from February, would be linked to reserves certified in the Ayacucho-1 Block in the Orinoco heavy-oilfields. Venezuela's digital miners have been busy creating 100m units of the new currency, valued by the government at around $6bn.

While Maduro gets full marks for creativity, this cryptocurrency gambit isn't likely to succeed in addressing any of the country's broader economic problems.

Digital currencies like Bitcoin have grown popular because they operate independently of central banks, governments or other central authorities that are subject to political whims and corruption. Unlike the dollar, ruble, pound or bolivar, there's no central body that can intervene in the market for Bitcoins and other similar digital currencies by, for instance, managing the money supply. Cryptocurrencies derive their value primarily from owners' trust in the underlying blockchain technology, which makes all transactions transparent, and the algorithms that strictly govern the mining of new coins.

In theory, a cryptocurrency with such a built-in algorithmic defence against the sort of macroeconomic mismanagement that has destroyed the value of the bolivar and plunged Venezuela into hyperinflation would be an attractive pitch.

$6bn—Government valuation for 100m Petros

But this isn't at all how The Petro is proposed to work. The government has simply pre-mined 100m units and plans to auction them off for cash, with vague promises that the value is backed by the nation's vast oil reserves. It hopes a secondary trading market will blossom, but unlike other cryptocurrencies, it doesn't have a decentralised system for "mining" new coins, or clear rules on if or when new Petros can be put into the market.

In other words, there's nothing to prevent the government from simply switching on the digital printing press and undermining the Petro's value the next time it's hard up and facing a big bond payment.

There are other problems with the plan. Maduro has touted The Petro primarily as a means to circumvent the US financial sanctions that have made it nearly impossible for Venezuela to raise fresh capital. It's unlikely to work. US treasury officials say The Petro is, for all intents and purposes, a new debt issuance falling under sanctions prohibiting Americans and US-based entities from taking part in such new financing arrangements. Any American or cryptocurrency exchange dealing in Petros, then, would risk falling foul of sanctions.

It's also ripe for corruption, already an endemic problem in Venezuela's Byzantine currency exchange system that allocates dollars to government loyalists at rates far below the actual market rate. Further fuelling corruption concerns is the fact that the initial coin offering was taking place in secret, potentially allowing the Maduro government to give its allies access to the coins at a steep discount. "It is tailor-made for corruption," the opposition lawmaker Jorge Millan said in January after the country's National Assembly ruled The Petro illegal and warned potential investors it would be scrapped when Maduro leaves office.

Even The Petro's claim to be backed by physical crude reserves is shaky. There's no mechanism to actually trade one Petro for one of the barrels of Orinoco oil the government has said is underlying the value of the currency. The reserves sit in the Ayacucho-1 Block, which has certified reserves but no active production or development programme. Even if it did, there's the vexing question of having a currency backed by a resource that, unlike gold or diamonds or other natural resources, would disappear if it was ever lifted out of the ground, refined and burned up in an engine.

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