A Primer on the Venezuelan Petrocoin
December 10, 2018
Venezuela is facing an inflation rate estimated to reach one million percent this year and an economic contraction of 40% from 2013-2017. Consumers have been forced to bring bags of cash to pay for even the most basic goods: the price of a cup of coffee rose to one million Bolivars this year. As a result, food and medicine shortages are widespread, and over 1.5 million Venezuelans have fled the country to escape these dire economic conditions.
What’s a Cryptocurrency Again?
While traditional currencies are regulated by a central authority which decides how much money to print, cryptocurrencies are created via “mining” operations. Solving complex mathematical equations to add transactions to the public ledger (a publicly available record of all crypto transactions), miners are awarded by receiving denominations of that currency. Because this ledger is recorded and verified by independent nodes on the network, no centralized regulatory bodies are required to maintain the integrity of the system. Everyone has access to each transaction, so transactions are legitimized when a larger number of independent nodes agree that said exchange occurred.
This system of distributing a public ledger of all transactions to each individual in the system is the core of blockchain technology on which cryptocurrencies are based. Instead of relying on a central authority to ensure that the system remains secure, the blockchain allows for “trustless trust” by allowing the users to verify that each transaction has occurred. Because each member in the system can view the blockchain, no one user is able to cheat the system by artificially creating a transaction that did not occur. If one were to attempt to do so, every other member would see that their copy of the ledger does not contain this falsified transaction and therefore throw it out as illegitimate.
While traditional cryptocurrency values fluctuate via supply and demand, the Petro is pegged to the cost of a barrel of oil. However, this cryptocurrency is subject to a “discount factor” determined by the Venezuelan government, a tool by which the value of the currency can be arbitrarily manipulated. Furthermore, Venezuela decided to mine all 2.7 billion coins themselves, then offer them up in an “Initial Coin Offering” which included presales to many foreign governments. The government will set up 16 exchanges through which citizens may exchange the rapidly deteriorating Bolivar for Petro. To incentivize the currency’s adoption, citizens are given tax breaks for using the Petro and the Indian government is reported to receiving a 30% discount on oil purchased using the new currency.
Implications for Sanctions
After the dubious 2018 elections, in which President Maduro was reelected, President Trump passed sanctions on the country which barred citizens from buying debt payable to the Venezuelan government. The sanctions are an effort to reduce avenues for corruption by which officials may embezzle funds through illegitimate sale of public debt, including those produced from the country’s state-owned oil company. Critics of the coin argue that the Petrocoin is simply a way for the Venezuelan government to increase its foreign exchange reserves. In fact, a reported $735 million fund was raised on the first day of the coin’s existence. China, Russia, and Iran have all purchased Petrocoins, and the government expects to raise $6 billion in foreign exchange. In the face of increasing economic sanctions, some argue that the Petrocoin is merely a scheme through which Venezuela may circumvent such restrictions and bolster its dwindling stock of foreign exchange.
A Quick Fix?
While government officials state that the currency will invariably decrease transaction costs and help stabilize the tumultuous economy, critics are unconvinced that the Petro will adequately address the root causes of the economic crisis. Experts suggest that Venezuela’s reliance on oil is the main factor at play in this current downturn. In fact, 95% of the country’s export revenues come from oil. The price of oil has plummeted from its high in 2014, drastically reducing Venezuela’s GDP.
Supporters point to the absence of a bank through which transactions must traditionally flow through; this increased speed of transactions, they argue, will bolster the economy. Furthermore, the money raised through the coin’s sale to foreign states can be used to pay off debt, stimulate the domestic market, or purchase food and medicine. However, critics argue that the Petro won’t ameliorate food shortages. These began to climb following price controls that incentivized firms to cut production due to the price at which goods could be sold at.
Furthermore, the Petro is unlikely to spur increased oil production. The main cause of the PDVSA’s decline, the country’s state-owned oil company, is due to a politically motivated brain drain of expertise from the corporation. During the 2003 general strike, Maduro fired 19,000 PDVSA employees and installed cronies to top positions. This lack of experience is evident in that the oil giant neglected in invest in infrastructure vital to maintain, let alone expand, oil production. Instead of building such infrastructure, the politically-appointed management simply siphoned off revenue to pay for Maduro’s social programs. The root of the PDVSA’s problems are not the lack of a cryptocurrency, but mismanagement.
While blockchain technology and the rise of cryptocurrencies usher the world into an experimental phase by which the necessity of government-backed fiat currency is being questioned, it is not a panacea for Venezuela’s current crisis. While it appears that the Petrocoin will bolster government revenues in the short run, it is unlikely that the root cause of the crisis will be ameliorated or the mismanagement of the PDVSA reversed. Instead, the country would benefit from basic reforms such as diversifying its export earnings and reinstating expertise within the state oil company.
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