Published On: Mon, Feb 26th, 2018

The Blockchain won’t save Venezuela

petroThe petro is just a way to hide new international debt behind crypto mumbo-jumbo.

I don’t know why Venezuela’s “petro” cryptocurrency annoys me so much. It is partly that the promise of cryptocurrency was supposed to be trustless decentralization: You trust the thing because of objective certainties embedded in its open-source code, not because some authority tells you to. Meanwhile the petro is just the opposite. For one thing, you can’t trust the code; in fact Venezuela’s government can’t even get its story straight on what sort of code it is:

Investors will have to overlook confusion about how the currency will operate. The white paper says the Petro is built on the Ethereum network, while the user guide the government published says it’s on the Nem network.

Also irritating is that this cryptocurrency is supposed to “promote well-being, bringing power closer to the people” but you can’t buy it with Venezuelan bolivars. The reasons for this are obvious: The petro is not a currency, crypto or otherwise, but a way to raise hard currency externally now that Venezuela is cut off by sanctions from accessing the international debt markets. So the petro is just a way to hide new international debt behind a thin screen of blockchain. (The U.S. sanctions administrators, I should note, are not fooled.)

Also, I keep reading that the petro is a cryptocurrency that is “backed by oil.” What does that mean? First of all: It means that you need to trust Venezuela’s government to exchange oil for petros. (There are efforts to build decentralized pegged coins, but for the most part a peg requires someone to maintain it.) Obviously the petro does not give you a security interest in any oil. So the petro is unsecured oil-indexed debt of a government that is sliding into default and that has been barred from the international debt markets.

But it’s worse than that! Venezuela doesn’t even promise to give you any oil. The oil peg is just this:

The Bolivarian Republic of Venezuela guarantees that it will accept Petro’s as a form of payment of national taxes, fees, contributions and public services, taking as a reference the price of the barrel of the Venezuelan basket of the previous day with a percentage discount of Dv.

Imagine that someone told you, without using words like “crypto” or “blockchain,” that Venezuela was planning to issue perpetual zero-coupon unsecured debt that could be used to pay taxes in Venezuela at a valuation pegged to the price of oil, but that Venezuelans wouldn’t be able to buy that debt. I think it would be fairly clear that there is no use case for that debt. The Venezuelans who could use the debt to pay taxes can’t buy it with their bolivars. The foreigners who can buy it will get nothing from it: It doesn’t pay interest and can’t be redeemed for cash. It is simply a joke, a product for nobody. But if you add “on the blockchain!” then that somehow obscures all of the actual economics of the product.

By Matt Levine

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