By Surya Suresh
On Tuesday, 20 February 2018, Venezuela became the first country to launch its own cryptocurrency. The currency, named petro, is tied in with Venezuela’s crude oil reserves, the largest in the world. This move comes in the aftermath of a severe economic collapse, which has seen the country ravaged by poverty, diseases and food scarcity. In the past few months, the hype around cryptocurrencies has increased exponentially with them being hailed as the solution for so many of the world’s problems. So, is this move just playing to the hype or is it a sustainable long-term solution to Venezuela’s economic problems?
Understanding the Venezuelan crisis
Venezuela has been under socialist rule for close to two decades. This regime has resulted in a steep drop in production, a massive increase in subsidies and poor management of state resources.
Economics in Venezuela is closely linked with the country’s large oil reserves. The increase in oil prices in the early 2000’s enabled Chavez’s government to adopt populist measures such as free medical clinics, food subsidies and low-cost housing. The communist government also nationalized land and factories, thereby discouraging future investors. However, in the long run, with the regression of oil prices, these moves backfired as evidenced by the rising inflation, crippling poverty and heavy debt near the end of the Chavez presidency.
Crude oil forms 95 percent of the country’s exports, is quite literally Venezuela’s last asset. For a long time, the export of crude oil provided the country with the funds required to import goods and food. However, this has proven to be difficult in recent times owing to the sanctions imposed by the USA and EU on Venezuela.
Petro: The Venezuelan cryptocurrency
At its core, petro is no different from other cryptocurrencies. Transactions using the petro will be recorded on a digital ledger, namely the blockchain, which guarantees safety and anonymity. The difference between petro and other cryptocurrencies is that the former has Venezuelan oil as the underlying asset. The government hopes that this currency will attract foreign investors and provide a loophole around US sanctions. Plans are in place to circulate 100 million petro coins, with an estimated market capitalization of $5 billion.
The move has been met with mixed reactions. The government is naturally enthused with President Nicolas Maduro saying that “Petro is born and we are going to have a total success for the welfare of Venezuela”. He also mentioned that the currency had attracted interest from investors in Turkey and Qatar. Economists are wary about investing in the petro. Further, members of Venezuela’s opposition say that it is illegal to use oil for financial security.
The petro could certainly inject some life into Venezuela’s beleaguered economy, at least for the short term. The success of cryptocurrencies may encourage investors looking to make a quick buck, thus providing short-term capital to the government.
However, in the long run, ‘petro’ doesn’t appear to be a sustainable idea, especially given the global crackdown on cryptocurrencies and emphasis on stringent regulations. Moreover, there have been recent statements by the USA and the OAS about imposing sanctions on Venezuelan oil exports. While it is apparent that the USA is attempting to further its ideology through the facade of humanitarian concern, there is little that the tiny Latin American state can do against the USA’s global clout. Thus, for potential investors, it is important to consider the possibility that they may be left with a pile of worthless Bolivars when they eventually cash out. The aforementioned issues don’t present a pretty picture, particularly when one considers the legal regulations such as AML and KYC that would be involved while investing in the petro.
As a business decision, it is apparent that the risks far outweigh the upside for this particular investment, thus making it unlikely to succeed for the Venezuelan government. Mariano de Alba, an expert on Venezuelan policy concisely notes, “In the end, I don’t see how rich people who do their homework would see this as an intelligent investment”.
Featured Image Source: Visual Hunt
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