The 'cryptocurrency' of Venezuela it's not really a cryptocurrency at all

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The 'cryptocurrency' of Venezuela
People shout slogans during a protest against the food shortage, in the Armed Forces avenue in Caracas on December 28, 2017. President Nicolás Maduro attributes the shortage of international sabotage. Image credit: FEDERICO PARRA / AFP / Getty Images

By Frances Coppola, for Forbes January 8, 2018
I write about banking, finance and economics.
The opinions expressed by Frances Coppola collaborator of Forbes are his, exclusively.

For many, the "government cryptocurrency" is an oxymoron *. The objective of cryptocurrencies like Bitcoin is that they are not "issued" by any government, central bank or other "authority". Nobody controls them. They are decentralized, anonymous and subversive.

But that does not bother President Maduro of Venezuela. He plans to issue a cryptocurrency from the Venezuelan government, backed by the country's oil, gas, gold and diamond reserves. A unit of the new cryptocurrency - the "petro" - will be backed by a barrel from the Orinoco oil field in Venezuela, currently valued at $ 59. Maduro plans to issue 100 million petros. If the whole problem is sold at par, that's $ 5.9 billion. That would keep the FX reserves of the country with liquidity problems for a while.

However, the fact that Maduro sees the need to back his cryptocurrency with hard assets should immediately give potential investors a pause to think. Real cryptocurrencies are based on network effects for their value. People use them because they trust them. Yes, they are supposed to be free of trust, but as I pointed out earlier, crypto users do trust technology, even if they do not trust each other. Backing up a cryptocurrency with fixed assets is hardly a resonant endorsement of the issuer or technology.

There is a second problem, too. Both the country and its state oil company PDVSA defaulted on their debt in US dollars in November 2017: the International Swaps and Derivatives Association (ISDA) declared the default a "credit event", which triggered the payment of credit default swaps . Clearly, Venezuela is not producing enough oil to meet its obligations in US dollars. Why would someone buy claims for an additional $ 5.9 billion worth of Venezuelan oil?

Of course, as the new cryptocurrency does not confer a claim on Venezuela's oil production, but a claim on the oil that is still in the ground, in theory the new owners of cryptocurrencies could claim their own assets and drill the oil themselves. . But Venezuela's record in allowing strangers to drill oil in its territory is abysmal. What is the real value of oil in the soil, if the only way to extract it is through a joint venture with PDVSA, terribly mismanaged and possibly bankrupt?

And how much of this oil is really available to support a new currency, anyway? Much of Venezuela's oil has already been committed, particularly to China, in exchange for previous loans. Venezuela has a form to pledge assets that are already taxed by existing claims. How do we know that this is not more of the same?

Despite all these reservations, it seems that Venezuelans, in any case, are interested in the new cryptocurrency. Online cryptocurrency journals report that more than 860,000 Venezuelans have registered in the new Registry of Mining Cryptocurrencies of Venezuela, which is the only portal through which oil can be exploited. Yes, you read it well: in Venezuela, the government grants licenses to its cryptocurrency miners, just as it licenses its banks. In addition, the operation of the new currency will be supervised by the Superintendence of Cryptocurrencies and Related Assets. The government controls mining, the government supervises operations, the government establishes the price ... the petro is becoming less and less like a real cryptocurrency, is not it?

In fact, why are we calling this a cryptocurrency at all? In reality, it is a digital security backed by oil. Registering transactions in a chain of blocks and adding some cryptography does not convert it into a cryptocurrency. It is not decentralized, it is not anonymous, and it will not be used to buy and sell goods and services in Venezuela, although there are suggestions that it could be used to pay international suppliers. And, above all, its value depends on the reliability of a government that already violates its international obligations. Without confidence, it is not.

cryptocurrency? At first glance, it is about the difficult financial situation of the country. Although Russia and China seem to have agreed to a restructuring of Venezuela's debt, the issuance of more bonds is probably not the first. So Maduro has had a smart sibilant to alleviate the crippling shortage of FX in Venezuela and prevent future defaults. The rich Venezuelans (yes, they do exist) have been using Bitcoin to protect their wealth from hyperinflation.

Venezuelans who mine Bitcoin can sell their bitcoins for dollars, avoiding the government, while Venezuelans who want to get their money out of Venezuela can buy bitcoins. Forcing Bitcoin miners to register with the government does not necessarily help the government get their hands on their dollars. Why not encourage them to use a government cryptocurrency instead? But although the reduction of capital flight could help the government avoid the bankruptcy of the dollar, the hyperinflation that is now causing hunger among Venezuela's population will not end.

Only those who can extract the currency, or have US dollars to sell in the "virtual exchanges" where the problem will be placed, can obtain it. And because this is a government problem, the dollars will go to the government, not the people. Then, not only will there be no digital currency for ordinary Venezuelans, nor will there be more dollars. It's hard not to see this as a missed opportunity: introducing a new national currency backed by hard assets, or dollarization, can be a good way to end hyperinflation.

But it seems Maduro is more interested in getting enough US dollars to pay his Chinese and Russian payers than in alleviating the humanitarian crisis in his country. However, Maduro has declared that the new cryptocurrency is not just a way to alleviate Venezuela's financial crisis.

It is also about circumventing US sanctions. UU And it is revealing that Maduro is doing this now, when Russia is reportedly considering something very similar, also as a means to evade US sanctions. UU Maduro has not hidden the fact that he would like to break the dominance of the US dollar. UU In the oil market. Putin would also like to do it, and Russia and Venezuela have strong ties. Could this be a coordinated attack against the dollar by two of the world's largest oil and gas producers? Full disclosure: I do not own any cryptocurrency nor do I have plans to do so, Venezuelan or not. Note: The oxymoron (from the Greek ὀξύμωρον, oxymoron, in Latin contradictio in terminis), within the literary figures in rhetoric, is a logical figure that consists of using two concepts of opposite meaning in a single expression, 1 that generates a third concept . Since the literal sense of oxymoron is opposite, 'absurd' (for example, 'an eternal instant'), the reader or the interlocutor is forced to understand the metaphorical sense (in this case: an instant that, by the intensity of the lived during its course, loses the notion of time).
The recourse to this rhetorical figure is very frequent in mystical, amorous poetry and in functional analysis, since it is considered that the experience of God or of love transcends all the mundane antinomies. The Greek philosopher Heraclitus resorts to it frequently.