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CommentByte Me

Byte Me: petro is a stinker

Petrocoin 230x150 adobe stock made by sam?

Venezuela's petro seems destined to hang around like a bad smell rather than drifting into obscurity, as it deserves to. The country's president Nicolás Maduro has made it the basis of his country’s economy. It is an utter farce.

In a desperate bid to bring his nation’s spiralling economy under control, Maduro has revealed a new currency pegged to the petro — Venezuela’s supposedly oil-backed so-called cryptocurrency that was launched in February.

To recap: it’s not exactly backed by oil. Although Venezuela has 300bn barrels of proven oil reserves, the oil is still in the Ayacucho oil field and has not yet been extracted. While it is claimed that petro represents a claim on Venezuelan oil, in fact, each token represents a claim on the government for the price of a barrel of oil in bolivars. It's basically a floating rate note, assuming said barrels of oil ever float up to the surface.

Given that Venezuela is in default on all but one of its bonds (see separate story), the petro does not offer a particularly attractive credit story.

It is also not a cryptocurrency in any meaningful sense. The tokens might be tradeable on the NEM blockchain, but actual cryptocurrencies are not centrally controlled by anyone, which is one of their central characteristics, let alone a government.

So who would buy such a thing? Likely no one. Although Maduro claims the currency raised $735m on its first day, no evidence has emerged to support this claim. Those in the know say that the petro is completely devoid of credibility or traction. Even the real hardcore crypto fans say it’s a scam.

Petro may be a farce, but Byte Me has a suspicion that Maduro has bigger plans for the cryptocurrency. In addition to pegging the newly minted sovereign bolivar to the petro, Maduro announced that the Venezuelan minimum wage would be increased by more than 3,000% and that the government would foot the private sector’s bill for the increase for three months.

Byte Me suspects that wages may arrive denominated in petro. It will make no difference. The government’s guarantees of convertibility will be worth less than its bonds, and attempts to maintain the exchange rate will empty the nation’s cash reserves.

The problems are mainly with Venezuela’s credibility. The core concept of a government-backed tokenised commodity is not ridiculous and, if rumours are to be believed, Russia might follow Venezuela’s lead with something a little more robust.

But outside of the government’s woeful attempt to grab some cash, Venezuela is actually something of a crypto heartland. The economy’s woes have made it a twisted, parody of the Silicon Valley cashless utopia.

Bitcoin is used as a means of storing wealth. You can see why. $1m in bolivar when Maduro came to power in 2013, would be worth $3.40 now.

And, with cash thin on the ground, Venezuelans are turning to dash, a cryptocurrency based on secure, instant transactions, to pay for their everyday goods. Venezuela is now the second largest market for dash and, though statistics are hard to come by, it is likely that Venezuelans use more bitcoin per capita than anyone else in the world

Even mining is popular. One thing Venezuelans do have access to is cheap electricity, meaning they can mine bitcoin at competitive rates.

Collapsed economies are where the crypto value proposition becomes obvious. If our economic model is doomed by infinitely expanding debt burdens and drastically inflated asset prices (as whoever tweets under the handle @zerohedge constantly claims), then the bull case for bitcoin is stronger than we’ve been giving it credit for.

Sour grapes

The SEC has slapped down nine proposals for Bitcoin ETFs. We’ve always suspected they read Byte Me.

The tone of the hardcore crypto-enthusiast Twitter accounts in response to the news might best be summarised as sour grapes. Rather than being upset that a potential source of huge institutional capital will not be arriving after all, they tend towards a sanctified and smug air that ETFs are incompatible with the true bitcoin spirit.

They’re right, of course. ETFs have no place in the original vision of bitcoin as a decentralised protocol for cheap transactions, cutting out the traditional financial players. But you didn’t hear too many complaints about that when there was a possibility that a tide of hedge fund cash might get bitcoin trading back above $6,000.

The SEC is probably right to prevent bitcoin ETFs. The possibility that bitcoin’s meteoric price rise was the result, not of a huge investor bubble, but a huge exercise in manipulation and fraud, has yet to be discounted and, until it is, it’s probably best that the number of financial products offering exposure to it remains limited. The SEC thinks so, highlighting inadequacy in the provisions “designed to prevent fraudulent and manipulative acts and practices.”

It also remains unclear why the CFTC is happy with bitcoin futures, but the SEC is unhappy with bitcoin ETFs, especially since cash-settled futures also look to prices on exchanges to mark their value when settlement comes. 

But all hope is not lost for more complicated cryptocurrency-referencing derivatives. This week, major cryptocurrency exchanges Bittrex, Gemini, Bitstamp and bitFlyer launched a working group to establish a fully fledged self-regulating organisation (SRO). 

The exchanges have promised to develop custody protections for cryptocurrencies, improve transparency and provide actual market surveillance for regulators. 

CFTC commissioner Brian Quintenz threw his weight behind the organisation in a statement, saying that it could have a "meaningful impact on the integrity and credibility of this young marketplace". 

Byte Me agrees. As a stop-gap to appropriate regulation, an SRO could reassure regulators and larger investors that at least certain exchanges are not manipulating the price of bitcoin, or allowing naughty practices like wash trading — simultaneously buying and selling to give a false impression of market activity. Whether Byte Me wants structured products to pop up as a result of the SRO is a different story. 

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