Venezuela and the Problem of a State-Backed Cryptocurrency
This article was originally published on Wonk Bridge
It is now more than a full year since Petro, the world’s first state-backed cryptocurrency solution, was announced by the Maduro administration; a bold gesture of economic heroism addressed to the peoples of Venezuela, who suffer now under conditions more appalling than ever[1].
It’s a coming-together of heady intellectual character: a glamorous and volatile technological solution; the most notorious government in the Global South; oil, gold, social deprivation on an appalling scale, and the looming presence of invasion or perhaps coup d’etat. For years the Venezuelan government was content, perhaps monomaniacally so, to be reliant on their rich oil and gas reserves; last year’s offering of the Petro currency, linked to these assets, was perhaps Venezuelan president Nicolas Maduro’s final gambit to preserve the singular cargo on his by-now well-surrounded ship.
What?
Despite being enforced by Maduro, Petro is, as originally conceived, a Chavistic idea. According to the English-language translation of the PTR whitepaper:
“Petro (PTR) has its origin in the idea of president Hugo Chavez of a strong currency backed by raw materials. Its background dates back to proposals for global financial and monetary coordination prior to the hegemony of the US dollar, which resurfaced after the financial crisis of the late 1990s.”
This is unsurprising. Chavez’s particular alchemy — the one that led to a short-lived halcyon period in Venezuela during which a rampant impoverished class saw better days in literacy rates, healthcare quality and poverty levels — was turning oil directly into social works; it was this reliance on oil which led to the strain of Dutch disease[2] suffered by the administration, and which foregrounded the catastrophic economic failures that now see the average Venezuelan losing around 8kg of weight on average per year and as likely as not to be among the 50% not able to buy enough food on wage to meet basic hunger needs. Chavez’s diplomatic tendency towards the dragonite did little to abet the situation. One of Dutch disease’s chief effects is the sublimation of the domestic economy’s sustainability, necessitating foreign assistance and direct investment, something few nations with the power to do so had any reason to wish to provide to his Venezuela.
The paper does not specify as to whether or not the raw material currency idea originated from before or after Chavez’s declaration of “economic war” in 2010. The Maduro administration’s only seeming modification of note was to observe the contributing role in national hyperinflation being played, in part, by Bitcoin[3], and interpolate the Chavistic concept among the basic principles of decentralisation.
At any rate, the initial crude-oil backed offering of Petro has, since February 2018, been augmented further by Petro Gold (which, as its name would suggest, is gold-backed) and then junctioned to a a new fiat currency entirely, as in August of last year the Maduro government replaced the old Bolivar Fuerte with the new Bolivar Soberano currency, a move they took ostensibly to lariat a currency whose exchange rate to Petro could be fixed. One Petro (or one barrel of crude oil) now gets you 3,600 in B.S.
Why a Government Backed Cryptocurrency?
It is hard, looking through the Maduristos’ eyes, to miss the two superficial benefits of creating Petro. First and foremost, it enables them to circumvent U.S. sanctions against Venezuela, and make an extension of credit towards the government, at least until the questionable legality of this gesture becomes less the subject of U.S. treasury warnings and more the embroidery of executive orders that may or may yet not denote military intervention. Secondly, the idea of a currency backed by government assets not only removes some of the incentive for citizens’ increasing preference to store wealth in other cryptocurrencies, but appears to pave the way towards the haven of stablecoin.
What is Stablecoin? And is it?
One of the vogue concepts in Crypto towards the back end of 2018, “Stablecoin” appears to be the economic mastering of a particularly unwieldy oxymoron — a currency that enjoys the malleability and security benefits of decentralisation while exhibiting relatively little of the kind of volatility that can see “a coin…be worth five cents one day and five dollars two months later”.
This taming of instability works by, as it were, insuring the stability of one asset — i.e. the Petro — against the asset to which it is junctioned (gold, oil etc.), much in the same way that the volatility of a fiat currency, such as the US dollar, can be measured against the volatility of other fiat currencies.
In a sense this means that the ‘Stablecoin’, if that indeed is what the Petro can be called, may boast a degree of stability, but a highly conditional one. And with that admission of a potential ontological instability in the concept of the Petro, we can see the rub beginning to approach us.
When Stable is Not
To an extent, trust governs all finance; doom flies on swift wings to the bearer of debit whose reciprocity in the trade cannot be counted on. The issue, not merely with Petro but with Stablecoin in general, is the principle of the laws of perception. In the words of crypto-expert Aaron Suduiko,
[A] thing that’s worrisome about physically backed cryptocurrencies is it’s not always obvious that they are backed to the extent that their issuers/controllers say they are, and that can cause cascading issues in the utility and stability of the currency.
Going on, Suduiko draws attention to the furore that surrounded the issuing of Tether’s stablecoin offering last year. Intended to be shored up against the United States dollar, there was considerable fear, uncertainty and doubt (FUD) aroused among traders about whether or not Tether “actually was 100% backed by FDIC-insured U.S. dollars, as Tether claimed”.
Even those of you with a less than active interest in economics will have noticed the degree to which economic currents can be determined and re-directed by potential future risks and developments whose likelihood of actualisation is less than acutely probable — there’s little more than the panic caused by simple ‘uncertainty’ needed to demonstrate the roots of economics in art, not in science, as many among its neophytes might take for granted. And yet, these instances of FUD have real, tangible effects. Suduiko hits the point home:
That market sentiment led USDT’s price, intended to be stable at a dollar, to be pushed lower than 90 cents per USDT at peak FUD.
The Price of Credibility
The need for trust to be absolute in these still-most-volatile of monetary waters becomes the stuff of some anxiety when you consider how far you yourself might be prepared to go in backing the word of the Maduristos relative to their new currency. It’s an anxiety that then embitters into the fuel of nightmares upon investigation of those assets to which Petro is meant to be securely junctioned.
In August of 2018, six months after Petro’s ICO, Reuters mounted an investigation into those state assets which Maduro’s government had pledged would be the real-world tangibles ensuring the stability and reliability of the new state cryptocurrency, which the government’s ‘Cryptocurrency Superintendent’ Carlos Vargas promised would usable to “buy in the bakery”. Reuters’ findings were damning:
The coin is not sold on any major cryptocurrency exchange. No shops are known to accept it.
Vargas’ supposed Superintendent’s Office at the Ministry of Finance HQ in Caracas did not exist. It had no official web presence at all. The Atapirire parish, supposedly suppurating with rich oil reserves and designated by Maduro explicitly as the site of insurance for the Petro currency, has not seen welling activity in years. True to the decades-long stagnation of Venezuela’s industrial machinery, the few oil rigs in the parish “appeared small, old and abandoned.”[4]
Shortly before the publishing of the Reuters report, Vargas was fired and SEBIN[5] issued a warrant for his arrest, on the grounds of “Petro-related scam, fraud and deceit.” Reporting from NewsJR correspondent José Rafael Ramirez gave further flesh to the bones of what increasingly looks to be a fiasco; that Vargas was dismissed “for corruption”, accused of “deceiving Maduro”. As it so often does in politics, what at first seemed a work of the collectively nefarious — a government that spotted the success of Crypto and decided to mount an ICO perhaps “just to effectively print itself money”, as Suduiko suggests — comes to appear more like the doings of the singularly corrupt and the far more widely incompetent.
The question in 2019 remains: how can Petro possibly find sustenance? Its only hope is via a shoring up of that trust, a confidence that could only be plausibly be built by making it an internationalist endeavour, which according to the Latin American Post “[could] be achieved by offering large discounts and having the large foreign oil companies as the main muscle of interest and political closeness with the government.” And thus we are brought to our present state of deadlock: if Maduro does not relinquish control, he must look to China and Russia to subsidise Petro; if the Guaidóan National Assembly acquires control, then a broader internationalism of solution could become a plausible reality.
As it stands, with not even the false dam of a nickel to bite into, the peoples of Venezuela edge ever closer out of the despair of a future so painfully elongated into a more despairing wish for a short one, their government’s latest gesture towards giving them monetary means to fill a food basket as thin as the air itself above them.
[1] It would be vulgar to include so indulgent a tangent in the body of the article, but the conditions mentioned make the currying of the Western bourgeois mind by the comparatively tame spectres of the Trump administration and Brexit look all the more risible, like watching a person dressed as a lion tamer fainting with fright at the sight of a giant anteater, the same giant anteater that is a protected species in Venezuela, and the same one that its people, in their atrocious hunger, have been reduced to trapping and feasting on.
[2] Named after the situation which developed in the Netherlands after the 1959 discovery of the Groningen natural gas field; following the discovery, the the formerly prosperous Dutch agricultural industry was impoverished by the government’s decision to remove subsidy from it, in order to subsidise the economic development of natural gas. Competitive manufacture shrinks, and after a short period of growth in real wages and currency appreciation, gaping current account deficits beckon.
[3] Hyperinflation sets in when a currency has become so devalued that the citizenry prefer to maintain wealth in non-monetary assets, or in more stable foreign currency; since 2014, Venezuelans have been using the likes of Bitcoin and Dash as reliable stores of value.
[4] As the lack of maintenance of Venezuela’s infrastructural assets is one of the most paralysing effects of the current hyperinflation, it’s hard to imagine how the field could have been revived for operations even had there been ingenuous ambition to do so.
[5] Translated, the Bolivarian National Intelligence Service.
