Will Venezuela’s New ‘Petro’ Cryptocurrency Help Its Economy?

by Carlos Serquen, MBA ’18

Venezuela will Create New ‘Petro’ Cryptocurrency
The president of Venezuela, Nicolas Maduro, announced the creation of a Venezuelan cryptocurrency called the “Petro.” He mentioned that the Petro will help achieve monetary sovereignty, make financial transactions, and most important, fight inflation and overcome the financial blockade.

Venezuela’s current situation
The economic situation in Venezuela has been getting worse in the past years. For instance, rating agencies such as Standards & Poor’s and Fitch declared the country in “selected default” after it could not meet certain financial obligations. Moreover, according to the International Monetary Fund (IMF) this year’s inflation in Venezuela will be around 652% and there will be a reduction in the GDP of 12%.

US sanction and financial blockade
When announcing the creation of the Venezuela’s new cryptocurrency, Maduro referred to the sanctions imposed by US government last August, which prohibits US citizens and entities from negotiating new debt with Venezuela and its oil company PDVSA. These measures, close the country’s access to financial markets and thus to alleviate the fiscal deficit, which is estimated at 12 billion dollars by 2018. These measures also make it more complicated for foreign trade and Venezuela’s possibility of renegotiating external debt, which is about 150 billion dollars.

Cryptocurrency
A cryptocurrency is a virtual or digital currency that uses cryptography for security purposes. The most important feature of a cryptocurrency is that it is not issued by a central bank, which makes it immune to government interference.

Cryptocurrencies facilitate the transfer of money among people because the transfer is virtual and has minimal processing fees compared to traditional currencies.

How will the Petro work in Venezuela?
This mechanism will contribute to financial transactions within the nation and fight the financial blockade against Venezuela by being able to make exchanges with other nations that manipulate cryptocurrencies or Bitcoin system in the digital market. Therefore, this mechanism opens a new window of international financing for the economic and social development of Venezuela

The Petro will work under the same Bitcoin model, the first cryptocurrency created in the world and will be backed by Venezuela’s oil, gas, and diamonds reserves. Finally, the Petro will be supported and monitored by the Blockchain observatory in Venezuela.

Will it work? Diverse opinions by experts
The technical aspects should not be an obstacle. “You can connect to the internet and create your own cryptocurrency in 20 minutes by copying and pasting software code”, explains Garrik Hileman, economic historian from Cambridge Alternative Finance Center. Hileman points out that the key issue is that people give it a status of a trading currency and dare to use it. Moreover, Hileman believes the Petro is viable: “If it is properly done, it is something that can work and even solve some of Venezuela’s problems, such as giving it a reliable currency”. However, he mentions that the Venezuelan government must prioritize the “honesty and transparency” to carry out this project.

On the other hand, the president of the finance committee at the Venezuelan Congress, Jose Guerra, pointed out that the use of oil sources for this cryptocurrency gives rise to a very complex problem and stressed that it must start with the confidence of the citizens who acquire it. “I do not see that this can be applicable, practical and that it is a viable solution for the country,” he added.

Other critics agree that Maduro’s proposal does not sound very promising because a currency depends on the quality of the country, it does not matter if it is electronic or not, and Venezuela is not in a very good situation.

Advantages
There are two main benefits of adopting the Petro. First, it can help to circumvent the United States economic blockade in some way. Second, it could attract new international investors among crypto enthusiasts at a time when the country’s credibility is low.

Disadvantages
There are some disadvantages of adopting the Petro. For instance, unlike other countries like Rusia and the UAE that are conducting projects like this and their intention to launch digital currencies is to give themselves an air of modernity, Venezuela tries to find a way out of an unprecedented crisis. That’s why Venezuela is the only country that has offered to back the currency with an asset. Furthermore, analysts suggest that the Petro will generate a banking crisis because nowadays only banks work directly with central banks, and with the Petro, people will prefer to take their money from the commercial bank and put it in the central bank (through the state cryptocurrency), which is an option that does not exist right now.

Finally, it is difficult to conduct an analysis with the scarce information currently available related to the Petro. In the following weeks and with more available information, we will be able to reach more precise conclusions about this new adventure of president Maduro.

Reference:
Venezuela Will Create New ‘Petro’ Cryptocurrency, President Maduro Says. National Public Radio.
(https://www.npr.org/sections/thetwo-way/2017/12/04/568299704/venezuela-will-create-new-petro-cryptocurrency-president-maduro-saysway/2017/12/04/568299704/venezuela-will-create-new-petro-cryptocurrency-president-maduro-says)
Investopedia: https://www.investopedia.com/terms/c/cryptocurrency.asp
La Nacion, ¿Cuán viable es el petro, la criptomoneda de Venezuela (http://www.lanacion.com.ar/2088578-venezuela-crisis-nicolas-maduro-petro-criptomoneda-bolivar)
Reuters, Maduro’s cryptocurrency to fare no better than Venezuela itself: analysts (https://www.reuters.com/article/us-venezuela-economy/maduros-cryptocurrency-to-fare-no-better-than-venezuela-itself-analysts-idUSKBN1DZ2W4)
¿Cómo funciona la criptomoneda en Venezuela? Telesur. (https://www.telesurtv.net/news/Como-funciona-la-criptomoneda-en-Venezuela-20171204-0037.html