Venezuelan president Nicolas Maduro has been saying for months that his country would be releasing its own cryptocurrency backed by oil and gold. That day has finally arrived.
The Venezuelan Economy Department made an official announcement on 29 October (2018) letting both Venezuelan citizens and international investors know that Petro is now available for purchase.
Maduro's promises of a government-backed cryptocurrency have been met with plenty of speculation since he first proposed the idea in December 2017. Nearly a year later, and in the aftermath of the government's official announcement, speculation still runs rampant in the crypto market. Is Venezuela's Petro legit? And if so, how will it perform against bitcoin or other crypto?
An oil backed crypto
Venezuela's government developing its own cryptocurrency is problematic enough. By design, crypto works best when it is decentralized. A government-issued and controlled cryptocurrency is anything but decentralized, making it nothing more than a digital representation of that country's current fiat currency.
What makes Venezuela's Petro even more strange to the crypto market is the fact that it is allegedly backed by both oil and gold. Oil accounts for 50% while gold accounts for 20%. The remaining 30% is divided between iron and diamond assets.
In theory, backing up a currency with some sort of hard asset is supposed to give that currency value. Back in the day when the U.S. dollar was still backed by gold, you could theoretically trade in your dollars for an equal amount of the precious metal. Will Venezuelans be able to do that with Petro?
Moreover, the price of oil is terribly volatile. Despite worldwide demand, it is not a commodity that enjoys the same, stability associated with precious metals. The price of oil will ultimately have more to do with the value of Petro than the market forces that control the value of any other cryptocurrency.
How to buy Petro?
When we talk about bitcoin we talk about getting a digital wallet and then purchasing BTC through an exchange, ATM, or direct from seller. You can buy bitcoin using fiat currency or just about any other crypto on the market. Venezuela's Petro works in a similar fashion.
There are currently six cryptocurrency exchanges approved by the Maduro government to trade Petro. These are: Amberes Coin, Afx Trade, Bancar, Cave Blockchain, Criptolago, and Cryptia. If you've never heard of these exchanges, it's because they aren't that well known.
Venezuelans interested in owning Petro can purchase it via one of the exchanges using standard currency, Bitcoin, or Litecoin. The government intends to expand purchase options to also include Ethereum and Dash.
Maduro's plans for Petro
Maduro's grand vision for Petro is that it one day becomes the default currency for doing business in Venezuela. As long as he remains president, he intends to continue pushing Petro as hard as he possibly can. Maduro made some of his initial plans public back in October.
For starters, Maduro has stated that all Venezuelan oil purchases made both domestically and internationally must now be paid for using Petro. This has practical implications for a range of tertiary industries. The airline industry is one example. Any airline that runs routes through Venezuela and chooses to refuel at Venezuelan airports will now have to pay for their fuel with Petro.
Maduro has also said that Petro will now be the currency used to pay the salaries of local officials. It will be used for government purchase of goods and services as well. If Maduro follows through on those claims, Venezuela's public-sector employees will soon find themselves juggling both Petro and the country's sovereign bolivar.
Petro and Venezuela's hyperinflation
Everything Maduro has announced thus far seems to be on the up and up. So why is there so much speculation that Petro isn't really legitimate? It all boils down to Maduro's reputation as a politician and an economic leader.
Venezuela used to be one of the wealthiest countries in the world thanks to its robust oil exports. But under the leadership of Maduro and predecessor Hugo Chavez, Venezuela has become a target for US sanctions and foul play. Both leaders damaged the oil industry to the point that it could no longer underpin the Venezuelan economy.
Just in the last couple of years, inflation in Venezuela has risen by an incredible 700%. Such hyperinflation always guts a country's fiat currency, and Venezuela's sovereign bolivar is no exception. It is all but worthless today. Unfortunately, Maduro has tied Petro to both the bolivar and his nation's oil industry. Neither one helps Petro in any way, shape, or form.
If the Petro is just a digital representation of the bolivar, which it appears to be, it will be worth no more than the bolivar itself. Neither Venezuelan citizens nor investors will have any reason to buy it on the open market. And if there is one thing we know from years of studying cryptocurrency, it is this: the value of any given crypto cannot rise if there is no demand for it.
More of a political stunt
Plenty of Maduro's critics claim that Petro is nothing more than a political stunt intended to give the impression that the government is trying to do something - anything - to fix Venezuela's economic problems. And perhaps Maduro and his loyalists actually believe they can bring Venezuela out of its economic troubles by issuing a cryptocurrency. After all, they look at bitcoin and its astounding price that still hovers around USD $6k+.
Perhaps the Venezuelan government really believes Petro will increase in value enough to rescue the country. And given what appears to be a complete lack of understanding when it comes to economics, it is not hard to believe they would have such a mindset. But reality is a hard, cold thing. Petro may remain worthless because it is backed and controlled by a government in charge of an economy that is not doing well.
Crypto is best when separate from government
All eyes will be on Venezuela as we wait to see how Petro actually fares on currency markets. In the meantime, the underlying lesson here is that cryptocurrency is best when it is completely separate from government. Indeed, the entire basis for creating bitcoin - the world's first commercially viable digital currency - was to create a means of trade that could in no way be controlled by governments or central banks.
When we advocate bitcoin gambling, we do so because bitcoin makes it possible for casino players to do what they do without having to worry about government interference or bank transactions. Casino operators can accept bitcoin and other cryptocurrencies in jurisdictions where gambling for fiat currency is not allowed.
There are lots of very good reasons for gambling with bitcoin. There are lots of good reasons for operating an online casino that accepts bitcoin. All those reasons are in some way linked to bitcoin's decentralized nature.
Decentralization prevents governments and their central banks from manipulating the value of a currency. It prevents government from implementing policies that control money supply. The net result of both these built-in controls is a level playing field for anyone and everyone who chooses to deal in crypto. That is cryptocurrency's strength. Get government involved and that strength disappears.
Other governments are working on crypto too
Venezuela will be the testing ground for government-backed cryptocurrency. Meanwhile, other countries are working on their own cryptocurrencies as well. We recently published another post that mentioned Canada, the UK, and the US are all aggressively pursuing crypto platforms. Where they go with their plans may be affected by what happens in Venezuela.
Despite Maduro's announcement in late October, skepticism over the viability of Petro remains. It is not surprising that there has been no measurable interest in Petro during the first few days of its public availability. There are far too many questions surrounding Petro than there are answers.
At the end of the day, few people expect Petro to survive. But what about the other government backed cryptocurrencies lurking in the background? Will they succeed?
If a government cryptocurrency is to ever compete with something like bitcoin, it has to be completely separated from that country's fiat currency. It also must be offered based on the same kind of decentralized blockchain. If governments keep themselves and their central banks out of the picture, their new cryptos could actually succeed. But we all know that's not what they will do.
Government-backed crypto will simply be a substitute for existing currency and taking that currency digital so that the government can monitor, track and suspend an account at any time with a press of a button.
The problem always is government interference and that's why there's so much speculation surrounding Petro. But let's give credit for the efforts of the Venezuelan government for creating Petro. It will be a test case not only for other governments but also a test case for oil-backed crypto. Can we hear the Iranians smacking their lips already?