Op-ed: Maduro’s ‘Petro’ is the Wrong Answer to the Wrong Question

What could be a more enticing investment than a cryptocurrency backed by the rickety Venezuelan government?

Almost anything.

On December 3rd, Venezuelan strongman Nicolás Maduro announced that Venezuela would be offering its own cryptocurrency, backed by diamonds, oil, gas, and gold. With careening inflation and an economy plumbing new depths of poverty in what used to be one of Latin America’s most dynamic economies, one can excuse Maduro for trying to be creative.

While central banks, such as the Bank of Canada have toyed with implementations of a blockchain-based currency (of which Bitcoin remains the most prominent example, though the market is rife with competitors offering their own technical spin), they have largely failed to garner much public enthusiasm. In many countries with stable currencies and a functioning financial system, the day-to-day benefits of cryptocurrencies are, at best, marginal compared to universally-accepted cash.

Venezuela, however, has neither a stable currency nor a functioning financial system.

This is an attempt to solve two problems that bedevil Venezuela. The first is that their currency continues to inflate faster than a tube man at a used car dealership. Currencies backed by commodities (such as gold) have historically had less inflation. You don’t need high levels of trust when you can withdraw your gold and take it elsewhere. As on American banknotes, ‘In God We Trust’ says as much about the monetary stability of many ‘fiat’ currencies as it does about public piety. The second is that the United States of America, through the US Dollar, is able to effectively strangle the Venezuelan financial system’s access to foreign bond markets. Unable to make bond payments on time (ostensibly because of strict American enforcement of sanctions, but also because of widespread mismanagement), Venezuela’s financial situation is made even more dire.

Using a cryptocurrency to address these twin problems is critically flawed. The first issue is that, while backed currencies require less trust, they still do require trust. Venezuela is a notoriously untrustworthy state when it comes to its financial obligations and dealings with markets. Who is to say that they won’t lean on the magic money supply lever, as they have with the bolívar? Furthermore, the basket of goods backing the currency includes consumable goods that are extremely valuable for a cash-strapped state like Venezuela. It’s unlikely to let those valuable commodities sit in a vault, fallow. If the currency isn’t convertible – if you can’t go somewhere and exchange it for goods in the basket – then in what sense is it backed? Will the government sell and buy goods to maintain a stable price? The second issue is that Venezuela will still have problems getting money into the system. Contrary to some apologists, cryptocurrencies aren’t just ready money: they require others to value it and use it. If a consumer or an investor is faced with an array of possible cryptocurrency options, why would they use Venezuela’s?

The answer is probably money laundering. Cryptocurrencies make it relatively easy to conceal the path of transactions, so if a firm wanted to buy Venezuelan bonds and avoid sanctions, this is a possible path. But it is not a perfect path, and not a particularly good path.

Most likely, this is bluster from a dictator who knows that he needs to effectively deal with Venezuela’s deteriorating economic conditions and needs to try everything he can.