The Problem with Venezuelan Cryptocurrency

Cryptocurrencies are the latest buzzword in the international financial markets. Any company or nation that seems to be struggling with their finances is trying to use cryptocurrency to improve their situation. Corporations like Long Island Ice Tea and Kodak had announced plans to imbibe cryptocurrencies in their business model. This news sent their shares soaring higher even though using blockchain made little sense when the business models of these companies are considered. The New York Stock Exchange threatened to delist these companies since they were misleading the investors.

It seems like Venezuelan President Maduro has drawn up similar plans to mislead investors and buy time. At the present moment, the Venezuelan economy is in shambles. The official currency of Venezuela i.e. the Bolivar has lost 99.99% of its value. As per the latest data, 100,000 Bolivar can be converted to about 40 cents! That too would be lost in transaction charges. Hence, the Venezuelan currency is almost worthless. Prices have risen more than 2000000% since the year 2014. The savings of the entire nation have been annihilated. What is even more remarkable is the fact that Venezuela has massive oil reserves! Yet, they have been able to completely destroy their economy despite being in possession of a strategic commodity.

The Launch of the Petro

Out of this desperation, President Maduro has announced the launch of the Petro. This will be the official cryptocurrency of the state of Venezuela. President Maduro has been raving about the success of the Petro. He claims that he has sold $735 million worth of petro on the first-day presale of this cryptocurrency. He is also hopeful, that he will be able to generate as much as $7 billion in foreign investment from this currency.

What is the Petro?

It has been a wild year for cryptocurrencies. A lot of these currencies have been extremely volatile in 2017. Hence, the idea of adopting a cryptocurrency as a national currency is nothing short of a desperate move. However, it seems like the last attempt to save a broke and broken economy.

The Petro uses blockchain technology. A key aspect of this technology is decentralization. This means that the government will no longer have control over the process of currency creation. Hence, the government cannot spend money that it does not have and later finance it by simply running the printing press. Also, the price of the petro has been linked to a barrel of Venezuelan oil. Nicolas Maduro claims that the price of the barrel is currently at $60. Any fluctuations in the price of oil will directly reflect in the price of the petro.

Many countries like Russia, Iran, and Cambodia are also toying with the idea of launching their own cryptocurrencies. The success or failure of the petro will be an important lesson for all other nations as well as for the investing community at large.

Criticisms of the Petro

  • Firstly, false parallels are being drawn between the petro and the gold standard. Although the petro derives its value from the price of oil, it is not backed by oil. A currency is said to be backed by a commodity if it can be exchanged for that commodity at a transparent price. The problem with the petro is two-fold. Firstly, it cannot be exchanged for oil. Secondly, the price is linked to a barrel of Venezuelan oil. This price is not really transparent as Venezuela could manipulate the price of its own oil to decrease its obligations towards the petro. Hence, the petro is not at all as stable as a commodity backed currency would be.

  • A group of politicians who are opposed to the policies of Nicolas Maduro has opposed the creation of the petro. They believe that petro would replace the Fiat currency of Venezuela. This is because all businesses in Venezuela, as well as retirement accounts, will be forced to use the petro. These politicians believe that this is another attempt to embezzle public money. Maduro has not followed the constitutional procedure required to create a new currency. Instead, he is creating obligations from foreign investors, even though as per the Venezuelan constitution, he is not authorized to do so.

  • Another problem with the petro is that bolivars cannot be used to buy the petro. This means that most Venezuelan people will be unable to buy the petro. Most Venezuelan people do not have United States dollars which they can use to buy the petro. On the other hand, petro will only be accepted by businesses in Venezuela. Also, Venezuelan taxes can be paid in petro. Foreigners are unlikely to indulge in any of these activities. This has created a strange situation wherein people who are in possession of the petro cannot use them and people who can use the petro will be unable to obtain them.

To sum it up, this is only a way for the Venezuelan government to obtain dollars that it desperately needs to import grains and feed its starving population. The foreign investors who do invest in this so-called currency are likely to not earn any interest. In fact, there is a good chance that they may lose all their money.

❮   Previous  Article Next  Article   ❯

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Forex Markets