As you might have already heard, Venezuela is going through some pretty hard times right now. The country has been facing a political, economic and humanitarian crisis since 2012, which only seems to be getting worse over time. Some of the problems that the Venezuelan citizens are facing include hyperinflation, civilian unrest, food, and medicine scarcity. All of which has led to several manifestations against the government, and consequently a death toll of approximately 128. To solve some of these problems, president alias dictator Nicolas Maduro has been coming up with rather unusual and in multiple cases unfruitful methods, the latest one being “Petro” a cryptocurrency backed by their oil, mineral, and gold reserves.
Why a cryptocurrency?
Currency substitution is hardly a new concept, and given that inflation in Venezuela recently reached 1369% it can be easily stated that they are desperately in need of a new one. However, up till now, this measure has generally been implemented by means of “Anchor currencies”, the use of a cryptocurrency is definitely a first. The reason behind this is that with Petro, the government is also trying to get past its growing international isolation and most importantly the US sanctions imposed back in August as a result of Maduro’s power grab; currently preventing them from getting access to the financial system and many sources of funding. A task for which a decentralized currency, able to avoid central banks, is perfect for. This and the soaring prices of other virtual currencies such as bitcoin and Ethereum have made the creation of Petro a very attractive option.
How will they do it?
The announcement was made pretty recently during Maduro’s weekly 4-hour long TV show, and besides its name, he did not go into much details about how the cryptocurrency would function. According to Dr. Garrick Hileman, a professor at the University of Cambridge, it is possible to create a cryptocurrency in around 20 minutes just by copying and pasting the software code. However, the fact that Petro, unlike any other cryptocurrency on the market, will be physically backed by the country’s natural reserves increases the complexity of the project. This is because it means that the government will need to establish a formula to tokenize their assets, and most importantly to convince the public that the formula is accurate and that they won’t be constantly altering the formula. Something very challenging given that there is little to none juridical system in Venezuela and that Maduro’s government is well known for their lack of transparency and instability. Moreover, the announcement was met with backlash from the opposition, who declared that in order to do this he would need congressional approval. However, given Maduro’s history, it is very unlikely that this will prevent him from carrying out his plan.
Will it work?
A cryptocurrency would definitely help Venezuela evade US sanctions, that is, of course, if they can get sellers to trust and accept Petro as a form of payment. Besides this, the ideal event would be for it to also attract international investment in the form of cryptocurrency enthusiasts, which has been lacking since the 2014 plunge of the oil process. And according to Jesús Palau, a professor from The ESADE, it is also a subtle way to default on their debts while simultaneously leaving their doors open for investors.
On the other hand, it has also been stated that the replacement of the current currency could also provoke a bank run given that, if the central bank starts providing the services of commercial banks, then people would start taking the money out of their current accounts and putting it on the central banking system in the form of Petro, a situation that would provoke commercial banks to collapse and probably bring the whole economy down with them.
All in all, it is a fact that Venezuela is running out of options, and although the chances are slim Petro does give them the opportunity to boost trading and reach international markets. Nevertheless, just as any other currency, the trust that people and investors put in this one also relies on the credibility of the country. And given the fragile state of their economy, this is also a very risky move.