President Maduro of Venezuela, which is going through a deep economic crisis, has announced that his government will launch a new cryptocurrency named “The Petro”. The cryptocurrency will be backed by oil reserves and other natural resources. Example coverage.

Black Market Exchange Rate between the Bolivar and USD.

Image Source: Dolar Today

The Obvious Issues

1. The announcement is just that, an announcement. There is no evidence that Venezuela has already been working on a cryptocurrency, and politicians in the opposition party have announced that such a plan will not pass in congress. So, there is a very good chance that this may be cheap talk. This website may (or may not) be the official launch website of the currency and is rather sparse.

2. The second part of the announcement is the interesting one: the claim that the cryptocurrency will be backed by oil reserves and other natural resources. What does this mean?
   • Will there be a “natural resource” voucher or bond which exists at a pegged price to the petro, allowing holders to swap their petro for the voucher? Such a thing is not impossible….but that doesn’t mean its stable.
   • The current Venezuelan currency, the Bolivar, is theoretically backed by oil reserves and has depreciated by 57%. Pegs are only as good as the government and central bank that supports them, and all the evidence is that the Venezuelan government is not good at supporting pegs. (As an aside, if you believe that the Bolivar’s drop is the result FBI/CIA/Washington/capitalist/etc. plot and not because of the actions of the Venezuelan government, then at least concede that the Venezuelan government has not been able to prevent the attack on the Bolivar, and will probably be unable to prevent a follow-up attack on the Petro).

Wait a moment…

The thing is, I’m not sure Maduro is talking about a cryptocurrency, I think he is talking about a digital currency. All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies. Paypal uses a digital representation of the USA currency. World of Warcraft “gold” is a digital currency (specifically, a simulated currency). Neither one is a cryptocurrency. This is not just a philosophical distinction.

A cryptocurrency is based on a blockchain, and is
(1) usually decentralized, and
(2) either has a set generation pattern of new money (i.e. 12.5 bitcoins every (approximately) 10 minutes), or has had the entirety of its money supply created.

This is where things get complicated.

1. If the Petro is not decentralized then the Venezuelan government (presumably) will be the ones needing to approve every transaction and wallet.
   • What happens if the government shuts down-do transactions for the day simply not get approved?
   • If the government is ousted and a new currency is issued, what happens to the old currency?
   • Does the government intend to collect full identification of every account to which the digital currency is issued?
   • What happens to those who oppose the government: will they be banned from holding the new currency or face retaliatory slow or dropped transactions?

2. If the Petro does not have a fixed money supply or money generation, the incentive to simply issue new coins beyond the economy’s ability to absorb them (for example, to pay debts) still exists, and will simply lead to the same instability currently faced by the Bolivar.

3. How will the unbanked or unconnected access this currency?
   Will the Bolivar cease to exist? In that case, a way needs to be devised to allow everyone Venezuela access to a digital system. If the Bolivar continues to exist, then it raises the possibility of a two-tiered currency system: one currency used by those with the funds and connections to obtain access to the cryptocurrency, and one used by those without that access.

The three categories of questions above need to be clearly answered if there is any serious hope of the Petro being adopted.