An oil-backed cryptocurrency? Introducing Venezuela’s ‘Petro’

On December 3, 2017, Venezuelan president Nicolas Maduro announced plans to create a national cryptocurrency called the ‘Petro’ that will be backed by the country’s natural resources, most notably its substantial oil reserves. Currently, Venezuela is facing  US government led sanctions that make moving money through international banks difficult — and Maduro believes a government-backed cryptocurrency will allow the Venezuelan government to regain control over its finances.

Speaking during a televised broadcast held weekly, he explained that the Petro would be useful as it would allow the country to “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade.” He added: “This is going to allow us to move toward new forms of international financing for the country’s economic and social development.”

Later in December, communications minister Jorge Rodriguez further specified the proposed cryptocurrency would be tied to the value of Venezuelan oil. Stating that the first offering of the digital currency was only days away, he said: “Camp one of the Ayacucho block will form the initial backing of this cryptocurrency. It contains 5.342 billion certified barrels of oil. We’re talking about backing of $267 billion.”

The Ayacucho block is part of Venezuela’s southern Orinoco Belt of oil reserves. Venezuela is the country with the world’s largest oil reserves, according to OPEC, with a reserves of 302 billion barrels of crude oil. Further explaining the hopes that the creation of the digital currency would be instrumental in circumnavigating the US-led sanctions, Rodriguez added: “It will be materially impossible for the dictatorial financial centers of the world to intervene against this initiative. It will allow us to overcome any financial blockade.”

Venezuela’s economic situation

Venezuela has been grappling with a distressed economy for a number of years. During the regime of former president Hugo Chavez there was a brief period of economic stability when the country’s main export, oil, was selling at high prices. At one time, a barrel of oil was being sold at a historic high of $147. Chavez used these funds to heavily subsidize food and medicines, leading to perceived economic stability in the country.

Following the fall in oil prices (a barrel is currently sitting at around US$65), the government was unable to continue providing subsidies through public programmes for its citizens. After an attempted coup, Chavez sacked the individuals running the Petróleos de Venezuela (PDVSA), replacing them with unqualified political loyalists. The mismanagement that ensued within the state-run oil and gas company further catalysed Venezuela’s dip into economic instability.

The standard of living fell as food and medicine shortages became widespread. The country defaulted on its debts while simultaneously racking up further debt. Fears of hyperinflation rose as the bolivar quickly lost substantial value. In an effort to combat rising inflation, the government restricted access to foreign currency, specifically the US dollar, and set the price at ten bolivar to a dollar. However, on the black market, where most people purchase dollars, the going rate is closer to 137,000 Bolivars to one dollar. With these extreme conditions, many Venezuelans were reported to be unable to find food as supermarkets lay empty, with reports of deaths due to dehydration and starvation.

Refusing to publish any statistics since 2014, Maduro blames most of Venezuela’s problems on interference by the US. He says economic sanctions placed by the Trump administration have prevented him from refinancing the country’s debts and starved it of foreign exchange. It is, therefore, no surprise that he would look towards the cryptocurrency space for a solution.

How the Petro works

In theory, the Petro will be tied to the value of a barrel of oil. President Maduro stated: “I have ordered the emission of 100 million petros with the legal sustenance of Venezuela’s certified and legalized oil wealth. Every petro will be equal in value to Venezuela’s oil barrel.” This means the total value of the cryptocurrency will be around $6 billion.

In order to mine it, people will have to be registered with Venezuela’s Registry of Cryptocurrency Miners. This agency was created in order to track people mining bitcoin as Venezuelans started to use the digital currency in an effort to hedge themselves against inflation as well as to purchase food and other items online. All operations related to Petro will be under the jurisdiction of the country’s Superintendency of Cryptocurrencies and Related Assets.

Currently, there are over 860,811 people already registered with the mining body seeking to mine Petro. Maduro revealed that some of the people registered would be employed by the government to set up mining sites across the country. He said, “We are going to call them, a special cryptocurrency team, to set up mining criptomenoda farms in all the states and municipalities of the country."

Is Petro really a cryptocurrency?

Blockchain-based cryptocurrencies such as bitcoin possess certain inherent characteristics. Most notable of these is their decentralized nature. The fact that no government can control the issuance or transactions of bitcoin is arguably the most important selling point.

The Petro would be a government-issued digital currency, where miners have to be registered with a government body, that would be backed by an asset that is fully government controlled. This is clearly at odds with the traditional definition of a cryptocurrency and, moreover, it is unclear how transparent the Petro blockchain will be and who will control whether the coin will actually be backed by barrels of oil as stated by president Maduro.

It remains to be seen whether Petro coin will actually materialize. The move is already facing opposition from Venezuela’s parliament. The House voted to name the creation of the Petro illegal. Legislator Jorge Millan was quoted saying: “This is not a cryptocurrency, this is a forward sale of Venezuelan oil. It is tailor-made for corruption.”

Moreover, there is likely to be few who will buy into the Petro if it does indeed come to life. The government’s mismanagement of the country and the PVDSA has likely eroded all investor faith in their ability to efficiently control the currency. It is, therefore, unlikely that the Petro would succeed and become a stable store of value and means of exchange.