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A Primer on the Venezuelan Petrocoin

December 10, 2018
On April 9, 2018, President Nicolas Maduro declared the Petrocoin as the official tender of Venezuela. Government owned companies were given 120 days to comply with the order, and citizens will be able to pay for taxes, fees, and public services using the new cryptocurrency. In addition, the President declared that special economic zones will be created in which people will be able to use the coin for everyday purposes.[1]

Image: Venezuelan flag at protest, Source: Wikimedia CommonsImage: Venezuelan flag at protest, Source: Wikimedia CommonsThe Backstory

Venezuela is facing an inflation rate estimated to reach one million percent this year and an economic contraction of 40% from 2013-2017.[2][3] 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.[4]

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.[5]

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.[6] 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.

The Petrocoin

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.[7] 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.[8]

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.[9] Critics of the coin argue that the Petrocoin is simply a way for the Venezuelan government to increase its foreign exchange reserves.[10] 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.[11]Image: Time in years that would be necessary for the BsF to lose 90% of its value if inflation was constant, at current inflation rates, Source: WIkimedia CommonsImage: Time in years that would be necessary for the BsF to lose 90% of its value if inflation was constant, at current inflation rates, Source: WIkimedia Commons

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.[12] 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.[13]

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.[14] 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.

Image: Venezuelan oil balance, Source: Wikimedia CommonsImage: Venezuelan oil balance, Source: Wikimedia Commons

Looking Forward

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.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

   [1]https://cryptoslate.com/venezuelan-government-declares-petro-legal-tender/

  [2]https://www.reuters.com/article/us-venezuela-economy/imf-projects-venezuela-inflation-will-hit-1000000-percent-in-2018-idUSKBN1KD2L9

  [3]https://www.businessinsider.com/statistics-about-venezuelas-economic-collapse-2017-8

  [4]https://www.businessinsider.com/countries-are-struggling-to-settle-huge-surge-of-venezuelan-migrants-2018-6

  [5]https://www.brookings.edu/blog/techtank/2015/01/13/the-blockchain-what-it-is-and-why-it-matters/

  [6]https://publicpolicy.wharton.upenn.edu/live/events/152-blockchain-the-rise-of-trustless-trust

  [7]https://www.brookings.edu/blog/techtank/2018/03/09/venezuelas-petro-undermines-other-cryptocurrencies-and-international-sanctions/

  [8]https://www.ccn.com/venezuela-offers-india-30-oil-discount-on-petro-purchases/

  [9]https://www.nytimes.com/2018/05/21/us/politics/trump-maduro-venezuela-sanctions.html

  [10]https://www.brookings.edu/blog/techtank/2018/03/09/venezuelas-petro-undermines-other-cryptocurrencies-and-international-sanctions/

  [11]https://www.brookings.edu/blog/techtank/2018/03/09/venezuelas-petro-undermines-other-cryptocurrencies-and-international-sanctions/

  [12]https://www.ccn.com/venezuela-petros-impact-will-be-felt-within-three-to-six-months/

  [13]https://www.cfr.org/backgrounder/venezuela-crisis

  [14]https://publicpolicy.wharton.upenn.edu/live/events/152-blockchain-the-rise-of-trustless-trust

  [15]https://www.bbc.com/news/world-latin-america-36319877

  [16]https://www.forbes.com/sites/rrapier/2017/05/07/how-venezuela-ruined-its-oil-industry/#68e86d0a7399

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  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>