Venezuelan President Nicolas Maduro has embraced the era of global digitization. His government’s recent invention, the petro, uses blockchain technology to imitate the latest stock market fad: cryptocurrencies.
President Maduro is taking advantage of technological advances to save Venezuela from its debilitating debt crisis, while simultaneously trying to ensure the U.S.- backed sanctions against Venezuela do not have any further negative effects on the country’s economy. Venezuela is one of the world’s most oil-rich countries but President Maduro has mismanaged not only the country’s national oil company, but also its economy.
Oil used to account for at least 90 percent of Venezuelan exports. It gave the contentious Venezuelan government a sense of security because it helped fund the government budget and ensure that the country had substantial foreign reserves. In the 2000s when oil prices were soaring, this dependency on oil made the Venezuelan government extremely financially comfortable. Unfortunately, this comfort lead to lethargy and arrogance. Therefore, when President Maduro took over from President Chavez in 2013, he didn’t inherit a booming Venezuelan economy but one that required economic restoration. Alas, instead of succumbing to economic pressures by implementing fiscally conservative policies, President Maduro chose to overvalue his currency. The result is that Venezuela is now $60 billion in debt and has less than $10 billion in foreign reserves. Over the years, President Maduro has tried various unconventional economic tactics to save his country’s economy. They have, more often than not, been unsuccessful. Nevertheless, while his strategy of trying to save his country’s economy using the latest technology may be an intelligent strategy, its implementation is key.
Much like President Maduro’s other economic strategies, the petro has been poorly implemented because of its uncertainty. The petro white paper claims that it has been built on the Ethereum network. However, the government user guide claims that it has been built on the Nem network. Moreover, it is the first cryptocurrency to be officially backed by a country, although the central bank apparently has no influence over it. This would be fine if the petro wasn’t pegged to the value of oil in Venezuela. For the most part, pegging a currency requires maintenance. If the petro is a government-sanctioned decentralized currency and the central bank has no influence over it, it is difficult to understand how this currency value will be maintained. This is especially important when considering the volatility of cryptocurrencies in the global economy in conjunction with the volatility of the Venezuelan economy over the last decade. Additionally, since oil production in Venezuela has decreased to only two million barrels per day, the government is trying to use technology to take advantage of its resources. According to Bloomberg’s Matt Levine, “the petro is just a way to hide new international debt behind crypto mumbo-jumbo.”
The Venezuelan government is using the petro as a temporary solution to its crisis because it is probably the most cost effective solution, especially since the Venezuelan government does not have much disposable income. President Maduro is utilizing the cryptocurrency fad by creating the petro. The petro raises oil revenue without actually extracting oil. The Washington Post claimed that the petro attracts investors because Venezuelan oil fields are backing the petro. This is flaunted at a “recovery rate of only 6 to 8 percent—meaning that existing technology only allows for extraction of a small portion of the underground reserves.” Since developing the Venezuelan oil fields in abundance is more expensive than the government can currently afford, the petro allows the government to use existing technology while promising returns. Therefore, pegging the petro to oil means increasing the value of oil without having to extract substantial amounts of it. The Venezuelan government also benefits from this since they can add the investment in the petro to their foreign reserve stockpile. This gives President Maduro almost instant access to cash.
Additionally, to make sure this process is carried out successfully, President Maduro has gained the support of the New Economy Movement (NEM) platform, which is a nonpolitical group that has built technology to support cryptocurrencies. They first supported bitcoin, which was the first decentralized and global digital currency. The blockchain technology used to create bitcoin allows for encryption techniques that manipulated using particular algorithms that regulate the units of currency without the supervision of a central bank. The NEM platform, after supporting bitcoin, now supports the first government-backed cryptocurrency. Venezuela has guaranteed that it will accept petros as a form of payment for national taxes, fees, contributions and public services. The price of an oil barrel from the previous day will be used as reference for the changing currency value.
That being said, the petro does not give investors any security interest in oil. It remains an unsecured domain and is being introduced at a time of uncertainty within the cryptocurrency market. The introduction of the petro comes at the cost of the Venezuelan people, who do not trust their current government. The petro brought in $735 million on pre-sale, which gives President Maduro enough money to start buying votes before his reelection in April. This also gives the bankrupt government some money to campaign with, but it doesn’t look like it will be invested in the economy or in the people of the country