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Latin American Economy & Business - March 2018 (ISSN 1741-7430)

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Venezuela: Introducing the crypto-petro fantasy

If President Nicolás Maduro is to be believed, his embattled government has just pulled off a master-stroke by launching the Petro, a crypto currency, which in a couple of days attracted over US$1bn worth of investments and placed the country in the technological vanguard of the 21st century. Unsurprisingly, not everyone sees it that way.

The government launched the Petro on 20 February. Officials said there would be a phased issue of 100m virtual Petro coins, each backed by one barrel of oil from the Ayacucho block (where reserves are estimated at 5.34bn barrels). Orders for an initial tranche were being sold in the period running up to 19 March at a reference price of US$60 a barrel, implying the total issue will be valued at round US$6bn (although prices for later tranches may vary). Maduro claimed that buy orders for the Petro totalled US$735m in the first 20 hours after its launch, rising to over US$1bn after the first two days. He said the new currency would allow Venezuela to counter economic sanctions imposed by the United States, commenting that “today a crypto-currency has been born to defy Superman who has not been able, and will not be able, to control us”.

Few details of who have been buying the Petros were given, but Maduro said that 36% of purchases had been in US dollars, 15% in Euros, and 49% in other pre-existing crypto currencies such as Bitcoin and Ethereum. Before the launch, Carlos Vargas, Venezuela’s new crypto-currency superintendent, had said the government was targeting investors in Qatar, Turkey, the Middle East, Europe, and the United States. 

There was certainly a wave of what could be called ‘Petro hype’. Government agencies including state oil company PDVSA were being authorised to accept payments in Petros and other crypto-currencies. Almost immediately after the launch the president said plans were in hand to launch a second crypto- currency, to be known as Petro Gold, which would be backed either by gold reserves in the Central Bank or by yet-to-be mined sub-surface gold deposits. Petro Gold would strengthen the Petro and enable Venezuela to fight back against the “economic war” waged against the country by the US government, as well as advancing the country’s “monetary sovereignty”.

There was also an announcement that Venezuela was opening its own crypto-currency school (based in Caracas and known as the Granja Laboratorio Petro School). Other countries are clearly interested in the Venezuelan experiment. Ahment Kenan Tanrikulu, a member of one of the political parties in Turkey’s ruling coalition, said he was recommending that the country launch its own crypto-currency, to be known as Turkcoin. “The world is advancing toward a new digital system,” he said, and Turkey “should create its own digital system and currency before it is too late”.

But it is fair to say many analysts see the Petro as, at best, just another sovereign debt vehicle and, at worst, as an outright con. Whether it actually is a crypto-currency at all is open to debate. Most crypto-currencies are traded via decentralised systems, using ‘open ledger’ blockchain technology based on transparent operating rules. The lack of a central authority is one of their attractions and one reason why a certain type of investor trusts them. In contrast, the Petro is very clearly controlled by the Venezuelan government, which has a notoriously poor financial record: the value of the existing Bolívar currency has been eroded by hyperinflation and the country is in partial default. There is little transparency about the operating platform (indeed official documents are contradictory – some say it will use Ethereum and others NEM as its technical platform); and the government is notoriously opaque about all economic data (it does not even publish data on the rate of inflation).

There are also question marks over the underlying link to oil or gold reserves. Sean Walsh, founder of a US based crypto-asset investment company, Redwood City Ventures, commented “Rather than buying a crypto currency based on gold, I’d just go and buy the gold. Gold is a physical thing that you want to be able to hold in your hands, because that’s the point.” Equally the “oil guarantee” underpinning the Petro is dubious, since each barrel is deep under the ground and very far from being monetised. In fact, developing the Ayacucho block will itself require billions of dollars and many years before the oil could begin to flow. Kenneth Rapoza, an analyst based in the US, noted that Maduro’s claims should be taken with caution, given that the president is also on record saying that the ghost of his late predecessor Hugo Chávez came to him in the form of a little bird. In an article for Bloomberg Matt Levine argued, “The Petro is not a currency, crypto or otherwise. But a way to raise hard currency externally now that Venezuela is cut off by sanctions from accessing the international debt market. So, the petro is just a way to hide new international debt behind a thin screen of blockchain.”    

In Brazil, there have been reports that national development bank BNDES is considering launching its own crypto-currency later on this year. Carlos Costa, the bank’s chief of budget and planning, has been quoted saying “We will be the first development bank in the world to use blockchain technology.” Blockchain technology can be used with any currency or unit of measurement, and does not specifically require the launch of a crypto currency, but Thiago Aragão of Brasilia-based consultancy Arko Advice has confirmed that BNDES “wants to use crypto currency for transactions that involve payments to borrowers”.

Fintech on the rise

While there will be hits and misses, the Petro is not the only experiment under way in the field of crypto currencies and alternative payments systems in Latin America. The financial technology, or fintech, sector is expanding rapidly in a number of countries. Sometimes this happens amidst a crisis and meets a real need. Venezuelans struggling to survive hyperinflation and food shortages will not be helped by the Petro or the Petro Gold. But, according to Widereven Villegas, who washes around 30 cars a day in Caracas for the equivalent of 50 US cents a time, they do use all sorts of mobile phone-based payments systems. None of Villegas’ customers can pay cash, which is not surprising given that the maximum daily cash withdrawal from an ATM is now 10,000 Bolivars, around 4 US cents at the black market rate. “I accept transfers. I have Tpago, Vippo, and almost all the applications out there,” Villegas told Reuters news agency in February. Caracas-based Vippo says it has had a thirty-fold increase in registered users in the last year. Another application, Citywallet, started enabling online parking payments in Caracas, and has now spread to other areas and begun operating in Chile.

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