Venezuela prepares to issue Petro: the world’s first national cryptocurrency
With an economy in tatters the Venezuelan government is hopeful of the potential for the Petro to compete in international crypto markets.
Venezuela has made history announcing the virtual minting of a national cryptocurrency, or cryptomoneda in Spanish. The socialist country led by President Nicolas Maduro has said that the new digital currency, called the Petro, will be backed by the nation’s reserves of oil, gold and diamonds.
With a known 5.342 billion barrels of oil valued at US$267 billion, that would make the Petro the world’s largest cryptocurrency in terms of market capitalisation. This development sets itself apart from other cryptocurrencies in that no other cryptocurrency provides the right of exchange for commodities such as oil, gold and diamonds as was explained by Venezuelan officials on 3 January 2018.
Utility of the Petro in international trade
It remains unclear as to how physical settlement of commodities in exchange for the Petro will occur. For countries looking to trade with Venezuela in commodities, it is most likely that the Petro will need to be acquired in order to facilitate trade.
For resource poor nations like China, who are also looking to develop a national cryptocurrency, exchanging Chinese Yuan for the Petro may lead to a more efficient system of financial transactions.
The reason for this is that the value of the Petro will be intrinsically tied to the price of oil. Not only has the price of oil been relatively stable since 2016, over recent months its price has been strengthening.
For national currencies like the Saudi Rial, these recent movements in the price of oil have benefitted the strength of their revenues. This has not been the case for Venezuela which has economic sanctions placed on it by the Trump Administration.
Those economic sanctions have made access to global financial markets difficult which places strain on the Venezuelan economy whose majority of government revenue is derived from the international sale of its national oil reserves.
For the Chinese, any opportunity to trade in the Yuan is welcomed and especially for commodities like oil. For Venezuela, any opportunity to sell oil and increase its market share of global oil sales would also be a prize.
Enter the blockchain
Enter the power of blockchain technologies into a global marketplace. With the privacy of the blockchain, the Petro stands to completely transform the Venezuelan economy’s present disadvantages in accessing global markets.
The trouble for the Bolivar, Venezuela’s national currency, is that to import commodities and food from other nations it either has to use US dollars or struggle to gain access to financial markets. As other countries begin to exchange their commodities and food for the Petro, that will allow those countries to then redeem the value of the Petro in gold, diamonds or oil.
This will bring a stabilisation in the terms of trade that Venezuela has with other trading nations by virtue of the relative stability in the price of those commodities. But most crucially, this trade represents a decoupling of the Venezuelan economy from the global system of international payments which at present is dominated by the US dollar.
The Petro as a disruptive force to the international system of payments
In addition to that, the countries involved in trade with the Petro will also experience a step away from that system of international payments. For a system of international finance that has lead the world for over 65 years, this is truly an event of historic significance.
Russia at present is in the developmental stage of a national cryptocurrency called the “crypto-ruble”. Senior bureaucrats there are optimistic of the potential for national cryptocurrencies such as the Venezuelan Petro to alleviate the pressure of “Western sanctions.”
The political unrest stemming from economic troubles culminated in a proposed legislative amendment to the Venezuelan constitution that removed the judiciary’s power to overrule presidential decree on judicial appointments and other changes to the structure of government. The public demonstrations which lasted for weeks on end have largely ceased. If the Petro can gain traction in international trade, which is far from certain, then this may also stabilise the Venezuelan economy.
Venezuelan political opponents to the socialist government of Nicolas Maduro have voiced strong opposition to the issuance of the Petro, discounting its potential stating that it will never see the light of day. The Maduro presidency seems to be emerging from severe civil unrest to be in a manageable position politically. This is a surprising achievement considering the 99% fall in the value of the Bolivar in conjunction with brutal protests that have seen severe violence.
There are wide criticisms of the belief that the Petro can become a viable cryptocurrency. It is believed that as a cryptocurrency issued by a government, it is not a decentralised cryptocurrency. Contrary to that, the Petro will be mined in a similar way to other cryptocurrencies giving fees to miners which will immediately add value to the petro and opens up the possibility of foreign nations accruing the Petro for their services processing transactions on the Petro blockchain.
For the growing community of crypto hashing Venezuelan businesses, an accrual of Petros may mean greater access to commodities markets abroad.
The date at which the blockchain will be released is yet to be confirmed, but the potential benefits of the Petro to stabilise the ailing Venezuelan economy are so considerable that implementation cannot be too far away.
This signals a historic shift in the ongoing revolution of international payments and cross-border trade for two reasons. This is the first example of a nation basing its cross-border system of payments on blockchain technologies. Second, if the Petro is successful it puts the power of US sanctions in jeopardy. What the future has in store for the Petro and the hopeful Maduro presidency, only time will tell.