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Venezuela's petro cryptocurrency meets cold reception

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Venezuela has become the first sovereign nation to launch a cryptocurrency. While few outside Venezuelan president Nicolas Maduro’s administration are impressed by the pioneering venture, others are expected to follow suit nonetheless, write Lewis McLellan, Costas Mourselas and Oliver West.

Maduro claimed on Wednesday that Petro, Venezuela’s oil-backed cryptocurrency, had raised $735m since its launch on Tuesday. The tweet in which he asserted this claim said the amount was CNH4.777bn. Maduro has a history of denominating figures in yuan to avoid referencing the US. No corroborating evidence is available to support his claim.

The president has announced that he will follow up by issuing Petro Gold, a currency backed by gold, next week. It remains unclear whether this currency would be backed by gold reserves or as yet unmined gold resources.

Crisis-stricken Venezuela has an urgent need to raise capital. Its already limited financing options were further reduced last year when US government sanctions barred any US persons from extending credit of more than 30 days to the country. Last year, Goldman Sachs drew the ire of Venezuelan protestors when it bought $2.8bn of bonds from PDVSA, the state-owned oil company, in a new money transaction in June.

Neither the government nor PDVSA, which together have around $65bn of dollar-denominated bonds outstanding, have made any bond payments since November.

Petro is theoretically backed by Venezuela’s oil reserves. Each petro token is supposed to be backed by a barrel of Venezuelan oil. However, owning a petro token does not entitle you to a claim on a barrel of oil, but on the Venezuelan government for the previous day’s price of a barrel of oil denominated in dollars. The benchmark providing the oil price is not clear from Venezuela's whitepaper.

Petros will also be accepted by the Venezuelan government as payment of taxes or fees for public services.

Other countries are already looking to follow Venezuela’s example. Kyle Wang, a senior consultant at IBM on blockchain and a cryptocurrency investor, said: “This is a great opportunity for smaller countries. Lots of countries around the world are looking to create a friendly regulatory environment and launch their own cryptocurrencies. It's easier for smaller countries to implement it than larger countries.”

Sanction dodger

Iran’s minister for information and communications technology tweeted on Wednesday that the country's state-run Post Bank is working on developing a cryptocurrency.

Russia is also believed to be working on its own project. Sergei Glazev, an economic adviser to the Russian government said publicly that a cryptocurrency version of the rouble would allow Russia “to settle accounts with our counterparties all over the world, with no regard for sanctions.”

Should the rest of the world fail to keep itself abreast of the latest developments in cryptocurrency, they risk being unable to enforce their established laws. 

Joshua Klayman, of counsel at Morrison and Foerster in New York said: “There are many potential reasons why governments around the world may be interested in blockchain technology from humanitarian efforts, to cutting costs, to many others. But, aside from potentially realising benefits from blockchain technology, if governments don’t invest the time and energy to understand blockchain technology and digital tokens, those governments may be hampered in their ability to deal with certain potential bad actors.”

International players in the cryptocurrency markets looking to support or profit from these state-backed initiatives could land in some serious trouble, according to Stephen Palley, of counsel at Anderson Kill. Nodes or miners for example, who help store and produce the ledger of cryptocurrency transactions, could be in scope for retaliation.

“State actors are examining cryptocurrencies for the purposes of getting around sanctions,” said Palley. “If you’re a node or miner, facilitating the transfer of assets illegally, it’s not clear that you don’t have liability."

Avoiding sanctions is not the only potential benefit of a state cryptocurrency. Estonia is planning to launch its own cryptocurrency this year. Estcoin is still in the “solution looking for a problem” phase, according to Kaspar Korjus, managing director of Estonia’s e-Residency government programme.

Sweden is also working on an electronic version of its krona. Japan, Singapore, Aruba and Canada among others have explored the possibility of a digital version of their currency.

Daniel Osorio, president of Andean Capital Advisors, postulates it as a form of borrowing against resources: “This could be revolutionary for developing countries rich in natural resources. Why does Chile not have a copper-backed currency, Botswana a diamond-backed currency, or Bolivia a lithium-backed currency? These developing countries have always had to rely on outside knowhow and capital to extract these reserves. A crypto-currency would enable them to monetise the reserves without having to access them right now. This would allow countries to be a lot more methodical in how they explore natural resources.”

While this idea may prove to have merit, it is important to note that cryptocurrencies represent a lowering of a barrier. Borrowing against natural resources is already possible, although it requires the services of an investment bank. While making use of a cryptocurrency lowers the cost, it also lowers the protections and safeguards that operate as part of traditional finance, potentially allowing capital to flow in unscrupulous directions. Without an enforcing body, ensuring that cryptocurrency claims are honoured remains a challenge, if not an impossibility.

Cryptocurrencies, like bitcoin, are decentralised systems for the transfer of value. Bitcoin, the original cryptocurrency, works through a distributed ledger. Each node or miner in the network is updated with every transaction that takes place. The nodes then compete to find a solution to a cryptographic function to update the blockchain, which contains a record of every transaction.

Because transactions are verified by the consensus of the nodes, there is no need for a central body like a bank to settle transactions. Miners are rewarded with new bitcoin.

The absence of an intermediary has led to bitcoin and other cryptocurrencies enjoying a certain appeal for people wishing to purchase drugs, guns or other illegal goods and services.

Maduro backlash

Two US senators have written to Treasury secretary Steven Mnuchin expressing concerns that Maduro would use the petro token to circumvent US sanctions.

Senators Marco Rubio, a Republican, and Bob Menendez, a Democrat, wanted assurances from the US Treasury that that it could “modify existing sanctions” to maintain their efficacy.

“We are concerned that a cryptocurrency could provide Maduro a mechanism by which to make payments to foreign lenders and bondholders in the United States, actions that would clearly thwart the intent of US-imposed sanctions,” wrote the two senators.

“Furthermore, Maduro’s actions and any corresponding response from the department will be closely watched by foreign sovereign states like Russia and North Korea that have expressed interest in either developing their own sovereign-backed cryptocurrencies or exploiting other cryptocurrencies for nefarious purposes.”

Petro has been broadly panned in the cryptocurrency community. The absence of transparency surrounding the process has proven worrying. Its investment proposition is unclear. Given that the price is pegged to the price of a barrel of oil, investors have only limited upside in terms of capital growth. There are easier ways to speculate on the commodity that do not involve making claims on a government in default.

Mati Greenspan, senior market analyst at eToro, said: “I would like to see a greater level of transparency, some procedure for getting oil for a token, and blockchain-verified proof that each token is connected to oil.”

Petro’s launch has been surrounded by confusion, misinformation and outright scams. Petrodollar, a smallcap cryptocurrency launched in 2014 unrelated to Venezuela’s petro, has experienced a colossal spike in its market cap. Investors conflating Petrodollar with the petro drove its market cap from $145,000 in November to almost $7m in December when the petro was first announced. Though it slumped back almost immediately, it has spiked twice since then and is (at the time of writing) around $2.3m.

Even the key mechanics underpinning petro are uncertain. While it was initially expected to be hosted on the ethereum blockchain, NEM, a competitor based in Japan, announced on Tuesday that petro would be hosted on NEM.

NEM is a less transparent system than Ethereum because transactions are not verified on the chain, but settled in batches. This makes it far more scalable than Ethereum, but means that it is harder to determine how much Petro has raised. Wang said: “I can see no technical reason for the move to NEM, especially with such short notice”.

Nevertheless, Osorio points out that, even if the Petro does not receive international demand, the government can impose it domestically. “Maduro wants to pay pensions with the Petro, and accept it for tax and utility bills. This cannot solve the catastrophic mismanagement of the economy, but the Venezuelan population — which has some of the highest per-capita crypto-currency usage in the world — could certainly end up using it with more confidence than the bolivar.”

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