What can we learn from new Venezuelan cryptocurrency?

What can we learn from new Venezuelan cryptocurrency?

At the end of 2017, Venezuelan president Nicolás Maduro announced plans to establish a national cryptocurrency called the Petro, backed by the country’s oil reserves.

Venezuela’s economy has been in a perpetual state of crisis for many years – the International Monetary Fund has tipped Venezuela’s inflation to reach 2,300% this year. The development of a state-issued cryptocurrency, in theory, would alleviate some of this pressure brought on by US sanctions. It would provide a quicker means of payments for suppliers, vendors, and investors, the president claimed.

It was a strange decision for the leader to make. Venezuela has been anything but accommodating to bitcoin and cryptocurrency. Authorities have shuttered exchanges and mining operations, arrested bitcoin users, and the government has established a register of cryptocurrency miners and their equipment to keep track of who is mining coins.

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The state’s heavily subsidised electricity services made it possible for miners to mine bitcoin in the hopes of attaining some of the digital coins to exchange for US dollars and to purchase essentials online. Venezuela’s bolívar has plummeted in value in the last few years.

Unfortunately for crypto enthusiasts in Venezuela, the authorities were having none of it. This is largely due to the decentralized nature that defines cryptocurrency and blockchain technology – no one entity controls it, and most certainly not government.

Maduro and Venezuela will not cede control of their economy too easily and deploying the Petro will be easier said than done so many are quite sceptical. Venezuela has demonstrated that it cannot run its own currency efficiently but can it run a cryptocurrency any differently?

“The most successful cryptocurrency cannot run under any government or authority. Depending on how this is designed, hopefully there will be more transparency,” says Nick Spanos, founder of the Bitcoin Center NYC and Zap.org.

Venezuela’s congress, which is led by the opposition party, has deemed the idea illegal and unconstitutional. It claims that by launching a cryptocurrency that’s backed by commodities, namely oil, the country would be betting against its own oil reserves and will undermine current laws on how the government borrows money.

“This is not a cryptocurrency, this is a forward sale of Venezuelan oil,” said Jorge Millan of the national assembly. “It is tailor-made for corruption.”

Furthermore, there is little in the way of protection for Petro holders if Maduro left office. The president is up for re-election later in 2018; nevertheless, Maduro wants to generate $6 billion worth of Petro tokens and has urged his neighbouring Latin American nations to collaborate on the project to make it work.

But Venezuela is still stuck with its bad reputation economically and was suspended from the Mercosur trading bloc in 2017. As the cryptocurrency proposal stands, Petros do not look particularly enticing to foreign investors, where protections for investments and property rights are lacking.

On the flipside, transactions carried out on a blockchain could provide greater security and transparency, allowing all parties to track where their money has gone.

As it stands, one Petro would be backed by one barrel of the country’s crude oil (around $50). Backing the digital currency with oil is one thing but if oil production declines, so too will the value of Petros. Venezuela hit a record low in oil production in 2017 but in mid-January, the country managed to claw back to nearly 1.9 million barrels per day

Spanos agrees that one Petro should only be generated at the moment a barrel is extracted from the ground, a feature he refers to as “oraclization”.

“A truly cryptographically-proven currency redeemable in a natural resource requires third-party 'oracles' to trigger the generation of the coin as it’s harvested,” he says.

“Just as the dollar used to be redeemable in gold, the only way more dollars could be created was to acquire more gold. If the crypto cannot be exchanged for the underlying commodity, or if it’s created in a fiat fashion without utility, it doesn’t offer as much real progress from the legacy banknotes.”

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Venezuela has no other significant raw materials like gold or diamonds to prop up the Petro and actually give it value. Oil accounts for 95% of its exports; without it Venezuela would be in even more dire straits. For that reason, many economists are already writing the obituary for the Petro before it even gets started.

If launched, the Petro would be not only be the first cryptocurrency issued by a government but also one backed by natural materials, like oil. Russia is also considering its own “cryptoruble” to similarly weave around international sanctions but it’s still not clear what shape that may take.

There is one crucial impact that the Petro may have, whether it is successful or not. It may soften the government stance on blockchain technology and cryptocurrency and what they can do. The government will still try to control the tech in some way but it could pave the way for better regulatory and legal understanding of blockchain and how it could help enterprises and sectors like finance operate more efficiently.

“It depends largely on the operation of its national cryptocurrency as well as the type of blockchain it is on,” says Travin Keith, managing director of Agavon, a blockchain consultancy.

“If it is possible for developers to create smart contracts on top of it like with the Hyperledger Frameworks, or utilise templated features such as the Smart Transactions on Nxt and Ardor, then it could attract developers to build on the platform,” he explains.

“If it only aims to provide services as a currency, then development will likely focus on third party off-chain services. However, if it gains enough traction, it could increase awareness about blockchain and increase the amount of development indirectly.”

Blockchain is being explored in various forms around South America. Brazil for example is trialling the technology for collecting voter petitions. There’s no such news coming out of Venezuela yet.

However, Spanos disagrees that Venezuela should introduce new regulations for blockchain in the enterprise. “In my opinion, new rules never help enterprises. There are already enough rules. When government is out of the way, the environment is fertile for innovation and progress,” he says.

“I don’t think that there are any rules that need to be set for companies building blockchain technology as there is no good reason to do so,” adds Agavon’s Keith. “Additionally, blockchain tech development for enterprises may have nothing to do with the Venezuelan cryptocurrency.”


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Jonathan Keane

Jonathan Keane is a freelance journalist, living in Ireland, covering business and technology

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