Here’s why Maduro’s ‘petro’ will fail, and why it should still concern us all

Photo credit: Andres Gerlotti via Unsplash

The government of Venezuela recently rolled out its own cryptocurrency, a form of electronic money built on a cryptographic algorithm. Fittingly for one of the world’s biggest oil producers, the coin will be “worth” a barrel of Caracas’ crude and called the ‘petro.’ They even did a pre-sale offering of the coin (to institutional investors) that they claimed brought in $735 million.

Venezuela is not the first country to go down this road. Ecuador recently announced a national “electronic money” (not a cryptocurrency, technically speaking), while governments from Singapore to Senegal have begun experimenting with their own digital currencies. And Russian parliamentarians introduced a draft law in late January to create a “crypto-ruble” codified as legal tender in that country.

But Venezuela stands out for the sheer brazenness of its coin offering: Nicolas Maduro’s government is shamelessly (some might say recklessly) promoting the petro as a way to skirt American and European sanctions. Caracas is desperate for cash to pay its bondholders, who are owed well in excess of $100 billion, and the government’s coffers are nearly empty. It’s a staggering situation for one of the most energy-rich countries in Latin America.

The Venezuelans’ crypto-plans did not go unnoticed in Congress. Senators Marco Rubio (R-FL) and Bob Menendez (D-NJ) sent an open letter expressing their concern about the ploy to U.S. Treasury Secretary Steven Mnuchin. (As of this writing, Treasury has not publicly responded.) In their letter, the senators also worried that Maduro’s scheme could inspire other unfriendly countries to follow suit:

“Maduro’s actions and any corresponding response from the [Treasury] Department will be closely watched by foreign sovereign states like Russia and North Korea that have expressed interest in either developing their own sovereign-backed cryptocurrencies or exploiting other cryptocurrencies for nefarious purposes.”

The thing is, crypto coin offering schemes like Venezuela’s are almost certainly destined for failure, not least because they’re born of a desire to evade lawful multilateral sanctions.

The real reason they’ll fail, though, is that they’re run by governments.

Photo credit: Markus Spiske via Unsplash

The Venezuelan example shows a fundamental misunderstanding of the reasons cryptocurrencies appeared in the first place. Fiat money instruments like the dollar, yen, ruble, or even the bolívar depend on trust in the government issuing them for their value. Cryptocurrencies, based on a transparent distributed ledger model, depend on openness and decentralization taking the place of trust.

Authoritarian regimes by definition demand control. They need to know they can make changes if a plan doesn’t play out as they wish. And even if there were such a thing as a benevolent dictatorship, that control-freak impulse is simply antithetical to the whole philosophy that underpins cryptocurrencies, namely that proof is better than faith.

This isn’t the first time an authoritarian regime tried to hijack technological progress for its own purposes. One look at an infamous list of places with the word ‘silicon’ in the name reveals numerous efforts to recreate Silicon Valley’s secret sauce elsewhere.

In democratic places, like Israel, this has sometimes been successful, mainly because they embrace the entrepreneurial ethos and don’t try to make it something it’s not. But in less democratic countries, for example with Russia’s Skolkovo “Innovation Center,” the approach has foundered because the government “investors” revert to business as usual, which under authoritarian regimes usually means bosses stealing from the government.

That’s another reason why the petro won’t get Maduro out of his fiscal jam. From the very beginning, they will be designing it as a mechanism to move government resources to private hands. That’s why they have to keep control. In the case of Venezuela, the government has already irreparably wrecked the national currency, so short of adopting another country’s currency as legal tender (as some have done with the U.S. dollar) — which, again, they wouldn’t have control over — Maduro is using the only thing the country has left for collateral: oil.

But the mere fact that these efforts will — at least in the long run — fail to deliver the desired result doesn’t mean that we shouldn’t be paying attention.

The recent example of the money laundering case of Turkish-Iranian “businessman” Reza Zarrab is instructive. Zarrab went to extraordinary lengths to hide transactions between Iran and Turkey that effectively allowed Iran to skirt multilateral sanctions. The fiendishly complicated nature of these transactions was revealed in a hand-drawn diagram that perfectly illustrated the ingenuity that one can muster when motivated by vast amounts of money. Billions — as well as in some cases national pride — are at stake. Simply put, it’s hard to launder money at scale.

Modern day Russia is another excellent example. Putin essentially created oligarchs by allowing them to buy state enterprises for pennies on the dollar. However, they failed to appreciate that they were making a deal with the devil. By helping them, Putin created an obligation that he could enforce — and has done so over and over — with state power.

Photo credit: Skeeze via Pixabay

Eventually, authoritarian governments will realize that they can’t issue and administrate a cryptocurrency purely in-house. Their next option will be trying to make the same sort of bargain with cryptocurrency companies that Putin did with the oligarchs: “I will make you rich, if you do what I say.” The leverage the government gets as a result increases dependence of companies on the government for survival. That dependence never goes away.

A key weakness of banking regulations is that they are only as good as the governments that enforce them. Venezuela, Russia, or any other country that wants to get into the cryptocurrency business only needs to create a veneer of enforcement, allowing an opportunity for regulators to look the other way while fiat money gets exchanged for a cryptocurrency. The way it stands now, once the money is in the “crypto loop,” it can go virtually anywhere, and tracking transactions becomes exponentially more difficult.

At the moment, with the total market capitalization of all cryptocurrencies less than half a trillion dollars (the largest, bitcoin, is around $150 billion), the threat posed by an authoritarian state coin is relatively low — even assuming they could pull it off. But as cryptocurrencies gain acceptance and grow capacity to fulfill more and larger transactions, money laundering at scale (say, in the millions of dollars in a single transaction) becomes a realistic possibility.

That day isn’t far off. Even the most grudging critics of cryptocurrencies admit that they aren’t going away anytime soon. Most analysts also acknowledge that cryptocurrencies can be expected to proliferate both in number and scale as consumers get accustomed to the new technology. There will also inevitably be consolidation as some currencies fail to attract enough customers.

The critical challenge faced by democratic governments and the world financial system is one of how to coexist with this new technology.

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Marc C. Johnson is a global security consultant and former CIA Operations Officer. He writes regularly about authoritarian regimes and cryptocurrencies. Follow him on Twitter: @blogguero