22 February 2018
Venezuela launched the pre-sale of its digital currency petro on 19 February. It is the first government to issue a digital currency and hopes to establish a new ecosystem around the token. Because the government of Venezuela is behind it, it raises naturally fundamental doubts about its credential as a currency. Its valuation makes it more an oil price-linked voucher. It does not reflect the underlying ideas and ideals of cryptocurrencies.
Venezuela has been in a deep financial and economic crisis for years. The bolivar collapsed and it defaulted on its foreign currency obligations. The bolivar is backed by oil to the extent that oil revenues constitute a large proportion of government revenues. The currency’s collapse is indicative that oil backing itself offers no guarantee for stability. The petro does not change that.
The petro is a digital token.1 It is based on the Ethereum blockchain and issued in a combination of pre-sale and initial coin offering. The validation provisions of the blockchain for proof of work are unclear so are the announced transition to proof of stake. Uncertainty about concentration and risk of collusion in the network for validation is substantial in particular in light of the large pre-sale commitment received.2 The issuance limit of the petro is set at 100 million tokens.
The valuation of the petro is linked to Venezuela’s oil price. The value has been set as a reference price at US$60 per petro. It will vary with the Venezuelan oil price basket and some discount set as a function of petros sold. The petro would trade at a premium to oil prices if some inherent advantages materialise over holding oil. It would trade at a discount if liquidity preferences or doubts about the validity of the scheme dominate. Payments in petros will only be accepted at the equivalent bolivar exchange rate and can be used to settle tax liabilities and in payments for public services. The discount rate and acceptance only at the bolivar exchange rate naturally gives the government considerable room for manipulation.
The petro could have offered a fundamental new approach to government issued currencies. It does not. To do so it would have had to delegate credibly blockchain validation and valuation to a decentralised network. The poor reputation of the Venezuelan government risks affirming doubters that cryptocurrencies promote fraud. At the same time, it serves as an interesting experiment of the co-existence of government issued physical and digital currencies. Venezuela though may sadly not be the role model proponents of cryptocurrencies would like to see.