At the start of December last year, the President of Venezuela announced that his government was planning to issue a state-owned cryptocurrency called “the petro.” According to President Maduro, the petro would be backed by the country’s oil, diamond, gold, and gas reserves. If the plan succeeds, Venezuela will be the first country to issue its own cryptocurrency and the petro will be the first commodity backed cryptocurrency. A few countries have considered the idea of a state-owned cryptocurrency. Many experts believe such a move will not have the desired impact as mainstream finance is built upon decentralization.
A Country in Crisis
Venezuela was once the richest country in Latin America. Buoyed by high oil prices, the South American state enjoyed economic prosperity during the last oil boom of the 90s and the 2000s. President Hugo Chavez, President Maduro’s predecessor went about utilizing the trillions of dollars earned from the sale of the country’s oil in carrying out a number of projects. While the country enjoyed its prosperity, there were already signs of an impending problem within the country’s economy. Despite the huge revenues raised from oil sales over a number of years, no attempt was made to diversify the economy. Venezuela was strictly a petrodollar economy.
Former President Hugo Chavez enacted a number of reforms in the oil sector that basically gave the government total control over the industry. The bulk of government spending and focus was on expanding the country’s oil exploration activities. Sectors like manufacture and agriculture were left unattended. Hugo Chavez was also seen by the West as a dictator and so, the country was slapped with a number of sanctions. The Bush Administration of the United States was particularly critical of President Chavez and his alleged dictatorial style of leadership.
The oil boom did not last forever and in the year 2016, the price of oil crashed to $26 per barrel. Almost overnight, the national income of Venezuela was slashed by more than 60 percent. The economy went into a full-blown crisis as the emergence of such a huge and sudden deficit caused things to go into an almighty tailspin. During the time of economic prosperity, the government in keeping with socialist philosophy kept a tight control over the prices of basic consumer goods. As a result, the emergence of a national deficit led to a massive inflation due to the lack of a mature open market economy.
With the economy in crisis, the socio-political landscape of the country began to experience a great deal of turmoil. Civil unrests became the order of the day. Protests all over the country have become a regular occurrence as citizens groan under the strain of scarcity and inflation. In a bid to solve the problem, the government has allegedly been printing money in order to improve the liquidity of the country’s currency. There have been violent clashes between protesters and security agents as the crisis in the country deepens. The US has imposed a number of sanctions on the country as well.
The Petro Crypto Solution
As a result of the crippling economic sanctions imposed on the country, President Maduro’s government has found it increasingly hard to do business with other countries. The country’s debt profile is at unprecedented levels and the Bolivar has crashed spectacularly. The move to introduce the petro is seen as a way to get around the economic sanctions that have been imposed on the country. Cryptocurrencies aren’t affected by mainstream economics which is usually controlled by the dollar. President Maduro has on many occasions, accused the US of waging an economic war against his country.
With an exchange rate of about 8,000 Bolivar to $1, the country is hoping to issue a commodity backed cryptocurrency as a means of stabilizing its economy. The petro is backed by more than 5 billion barrels of oil which are valued at $267 billion. Tellingly, the petro cannot be exchanged for a barrel of oil. The government is hoping to invite investors to put up equity in the petro since it is backed by a tangible commodity. Since the announcement last December, the government has been hard at work on its proposed plan.
Last month, it sent a high-level delegation to Qatar in a bid to woo the Middle Eastern country to invest in the petro. The delegation included officials of the country’s crypto Superintendency led by Carlos Vargas. Venezuela is reported to be offering Qatar a considerable discount on the petro. Qatar just like Venezuela is also suffering the effects of economic sanctions. A Saudi-led coalition has formed an economic blockade that has stifled the Qatari economy since 2016. Since the start of the blockade, Qatar has of necessity been extending its reach outside the Arab world. In the past 18 months, the country has signed deals and gone into trade agreements with countries like the US, the UK, as well as France and Italy.
Not everyone is on board with the move to introduce the petro. Both within and outside the country, there has been a strong condemnation of the proposed crypto plan. The country’s Parliament has called the move illegal and unconstitutional. Others have described as a plan that will encourage corruption in government. The Venezuelan Parliament is controlled in majority by the opposition party in the country. The Parliament and the government of President Maduro have been engaged in a long-running battle. The President has even accused Parliament of being in cahoots with foreign interests to the detriment of the country.
Financial experts have also called the move an IOU that is doomed to fail. The US Treasury Department has also condemned the move and say that they are monitoring the situation. For many, the plan constitutes a mortgaging of the country’s natural resources, something many feel the President has no right to do. The petro is expected to go on sale in February.