Venezuela’s ‘Cryptocurrency’ Isn’t Really A Cryptocurrency At All

I write about banking, finance and economics JAN 8, 2018Screen Shot 2018-01-10 at 7.55.16 AM

To many, government cryptocurrency is an oxymoron. The whole point of cryptocurrencies like Bitcoin is that they aren’t issued by any government, central bank or other authority. No-one controls them. They are decentralized, anonymous and subversive.

But that doesn’t bother President Maduro of Venezuela. He is planning to issue a Venezuelan government cryptocurrency, backed by the country’s reserves of oil, gas, gold and diamonds. One unit of the new cryptocurrency – the petro – will be backed by one barrel from Venezuela’s Orinoco oilfield, currently valued at $59. Maduro is planning to issue 100 million petros. If the entire issue sells at par, that’s $5.9 billion. That would shore up the cash-strapped country’s FX reserves for a while.

However, the fact that Maduro sees the need to back his cryptocurrency with hard assets should immediately give potential investors pause for thought. Real cryptocurrencies rely on network effects for their value. People use them because they trust them. Yes, they are supposed to be trust-free, but as I have pointed out before, cryptocurrency users do trust the technology, even if they don’t trust each other. Backing a cryptocurrency with hard assets is hardly a ringing endorsement of either the issuer or the technology.

There’s a second problem, too. Both the country and its state-owned oil company PDVSA defaulted on their U.S. dollar debt in November 2017: the International Swaps and Derivatives Association (ISDA) declared the default a “credit event,” triggering payment of credit default swaps. Clearly, Venezuela is not producing enough oil to meet its existing U.S. dollar obligations. Why would anyone buy claims to an additional $5.9 billion worth of Venezuelan oil?

Of course, as the new cryptocurrency confers not a claim on Venezuela’s oil production, but a claim on oil still in the ground, in theory the new cryptocurrency owners could call in their claims and drill for oil themselves. But Venezuela’s record on allowing outsiders to drill for oil on its territory is abysmal. What value does oil still in the ground really have, if the only way of extracting it is through a joint venture with the appallingly mismanaged and possibly bankrupt PDVSA?

And how much of this oil is really available to back a new currency, anyway? Much of Venezuela’s oil is already pledged, particularly to China, in return for previous loans. Venezuela has form for pledging assets that are already encumbered by existing claims. How do we know this isn’t more of the same?

Despite all these reservations, it seems that Venezuelans, at any rate, are interested in the new cryptocurrency. Online cryptocurrency magazines report that over 860,000 Venezuelans have registered with Venezuela’s new Registry of Cryptocurrency Miners, which is the only portal through which the petro can be mined. Yes, you read that right – in Venezuela, government licenses its cryptocurrency miners, just as it licenses its banks. Furthermore, the operation of the new currency will be supervised by the Superintendency of Cryptocurrencies and Related Assets.  Government controls mining, government supervises operations, government sets the price … the petro is looking less and less like a real cryptocurrency, isn’t it?

In fact, why are we calling this a cryptocurrency at all? Really, it’s a digital oil-backed security. Recording transactions on a blockchain and adding some cryptography doesn’t make it a cryptocurrency. It isn’t decentralized, it isn’t anonymous, and it isn’t going to be used to buy and sell goods and services in Venezuela, although there are suggestions that it could be used to pay international suppliers. And above all, its value depends on the trustworthiness of a government already in default on its international obligations. Trustless, it isn’t.