President Maduro enters the world of cryptocurrencies.
Is a currency worth anything if no one wants it?
The fact that the answer is an obvious “no” lies at the heart of Venezuela’s problem. Inflation in the Bolivar currency is running at more than 11,000 percent. Lucky Venezuelans are hungry; many others are actually starving. Medicine and healthcare do not exist for the majority and anyone who criticises the Government too loudly is likely to go missing.
And yet Venezuela should be one of the richest countries in the world. It has greater proven oil reserves than Saudi Arabia. But as the economy has collapsed under the weight of Government corruption, most of that oil remains deep underground. Now the President, Nicholas Maduro, has come up with what he hopes is a solution to this tricky problem.
He’s launched the first state-owned cryptocurrency – the Petro. The price of the Petro is pegged to the price of a barrel of crude oil. What it means in theory though is that every Petro is backed by a barrel of oil that is still deep beneath Venezuela.
To supporters this give it an advantage over other non-governmental cryptocurrencies, which are generally backed by nothing other than the confidence of buyers. What “backed” actually means in Venezuela’s case is yet to be seen. Many experienced observers are deeply sceptical, having had their fingers burned before.
Despite this, the Venezuelan authorities are already hailing the project a success. They claim more than $1 billion has been raised in the first few days of operation. This may not be a huge amount of currency in Governmental terms, but it would make a difference to poverty stricken Venezuela.
It’s now down to its last $10 billion in foreign exchange reserves, and is due to make a debt payment of $750 million in August. Unfortunately for President Maduro, claims of huge investor interest are undermined by his own Twitter feed. He revealed that Petros are such good value that he has ordered several state-owned companies to convert a percentage of their sales and purchases into the Petro.
In other words, Venezuela is trying to pull itself up by its own bootlaces. This is a wonderful concept that almost every child believes might be possible for a while, but which always ends in sore fingers, falling over and untied shoes. That doesn’t mean that Venezuela’s cryptocurrency project will fail immediately, however.
The Petro will appeal to people outside the normal cryptocurrency space. Venezuela is subject to economic sanctions by both the United States and the European Union. The government in Caracas acknowledges the Petro is designed to get around those sanctions. There are investors whose default position is to mis-trust the established world order and who may therefore find Venezuela’s buccaneering Petro an attractive proposition.
What is certain is that President Maduro is on course to become the first oil producer to receive rents from oil without actually having to produce any of it. Standby for a further announcement from Caracas in the coming days on the launched of a further cryptocurrencies pegged in some way to Venezuelan gold.
And remember, the market price of any currency is a measure of the confidence investors have in its value. While it is theoretically possible that President Maduro may confound his critics, it is also possible that the peg between the value of a barrel of oil and the Petro may slide if holders can’t find willing buyers when the time comes to sell.