The Conversation
Edition:
Available editions
Africa
Job Board
Become an author
Sign up as a reader
Sign in
The Conversation
Academic rigour, journalistic flair
Arts + Culture
Business + Economy
Education
Environment + Energy
Health + Medicine
Politics + Society
Science + Technology
In French
Don’t be fooled – Venezuela’s Petro is not really a cryptocurrency
February 23, 2018 1.03pm SAST
Author
Daniele Bianchi
Assistant Professor of Finance, Warwick Business School, University of Warwick
Disclosure statement
Daniele Bianchi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
Partners
University of Warwick
University of Warwick provides funding as a founding partner of The Conversation UK.
The Conversation is funded by Barclays Africa and seven universities, including the Cape Peninsula University of Technology, Rhodes University and the Universities of Cape Town, Johannesburg, Kwa-Zulu Natal, Pretoria, and South Africa. It is hosted by the Universities of the Witwatersrand and Western Cape, the African Population and Health Research Centre and the Nigerian Academy of Science. The Bill & Melinda Gates Foundation is a Strategic Partner. more
Republish this article
Republish
Republish our articles for free, online or in print, under Creative Commons licence.
Laughing all the way to the bank. EPA-EFE/Miguel Gutierrez
Email
Twitter14
Facebook18
LinkedIn
Print
Venezuela is suffering one of the worst economic crises of modern times. President Nicolás Maduro’s beleaguered government is overseeing scarcities of food and medicine, soaring crime rates and the collapse of public services and the health system.
But when it launched a new cryptocurrency, the Petro, in an Initial Coin Offering (or ICO) the virtually bankrupt country says it raised US$735m on the first day of the pre-sale.
Read more: Explainer: what are initial coin offerings (ICOs) and why are investors flocking to them?
Any rational investor would probably steer well clear of the 100m Petro made available. The ICO is obviously a way to raise money by getting around the sanctions against Venezuela, which prevent it from issuing bonds or securities in the regular financial system. It is in desperate need of US dollars, with inflation running into quadruple digits – which has made the Venezuelan bolívar worthless. Meanwhile, the production of oil, on which the country’s economy relies, has plummeted in the past year.
An interesting experiment
That said, the Petro certainly represents a very interesting experiment. It is the biggest ICO ever proposed and, if it hits its cap of around US$5 billion – which is highly debatable – that will represent about 5% of the total number of Ethereum cryptocurrency currently circulating and will equal more than a half of the entire revenues generated by ICOs up to 2017.
For Venezuela this is a smart option. Rather than restructuring the whole economy and linking a new currency to the US dollar, launching a cryptocurrency is much easier in an effort to fund the government and keep it functioning. If anything, because the Petro does not lead to any interference in the domestic political economy by third-party bailing-out institutions such as the IMF.
Venezuela’s oil production is down. shutterstock.com
It is fair to assume that the millions of US dollars being spent on the Petro are not coming from the US and Europe, as Venezuela is under strict financial sanctions and so trading in the Petro could land you in trouble. So it is probably coming from Asia and Middle East – and could be anybody from drug dealers to individual retail investors fancying a punt.
Having read the ICO documents it is unclear what the Venezuelan government plans to do with the money. More than half has been earmarked for a sovereign fund – which is yet to be created – and its exact purpose again looks quite blurry.
It is also very unclear as to the pricing of the Petro, which the document says will be linked to the price of a barrel of oil (currently about US$60) and given a “discount factor”, without defining how that is effectively calculated. In that respect, although anchored to the price of oil, the price of the Petro will be virtually controlled by the government. This could certainly be used to its advantage.
Not really a cryptocurrency
Ironically, Petro’s connection to the government goes against the whole idea of cryptocurrencies. They were originally designed to be decentralised and free from any government or central bank control.
In this sense the Petro is not really a cryptocurrency – it is a digital security or token, backed by oil reserves. You are not buying anything that can be freely mined and traded on open cryptocurrency exchanges. The mining is controlled by the government and, as explicitly mentioned in the ICO documents, it will decide what exchanges can trade the Petro. It is therefore simply a digital form of debt from a country with no financial credibility and that is badly mismanaging its economy.
You can expect heavy handed government involvement in Petro. EPA-EFE/Miguel Gutierrez
This is the last resort of a country with practically nowhere else to go. Any credible democracy can raise money in the usual ways through bonds and securities, so I can only see other countries in similar problems doing this. I wouldn’t be surprised if countries like Russia are next in line to take advantage of the hype surrounding cryptocurrencies as they are suffering under sanctions as well and have lots of oil.
The Petro may be easy to buy in the pre-sale, where typically most, if not all, of the coins are sold in an ICO. Then the ICO carries on for an indefinite period until the Venezuelan government has sold the 100m Petros it is aiming for. That could take many weeks, if not months – and only then will investors be able to trade the Petro.
Once trading starts, it’s hard to see the price volatility that we have seen in other cryptocurrencies, because the price is essentially controlled by the government. It is not linked to supply and demand. So anyone thinking of buying Petro should think: it might be easy to buy now, but will you be able to trade it after the ICO?
So despite representing a milestone in the growth of the cryptocurrency market, the Petro should be seen as a last-ditch attempt of a defaulting and desperate government to make a quick buck. It’s something that should probably raise concerns among anyone thinking of investing in it.
Oil
Bitcoin
Venezuela
Oil price
Cryptocurrencies
ICO
Initial coin offering
Global Perspectives
Tweet
Share
Get newsletter
You might also like
Bitcoin rich kids in Puerto Rico: crypto utopia or crypto-colonialism?
Inside Venezuela’s crisis: 7 essential reads
Global series: Venezuela’s collapse
Explainer: what are initial coin offerings (ICOs) and why are investors flocking to them?
Sign in to comment
1 Comment
Oldest Newest
Christopher Smith
It is very discomforting to see this action that is a close parallel to the actions of John Law which lead to the French Revolution. Why do people not learn from history? The investors over two hundred years ago are a painful example of what happens to such schemes.
2 days ago
Report
Most popular on The Conversation
Africa’s rich fossil finds should get the air time they deserve
The real reason why cities in sub-Saharan Africa aren’t issuing municipal bonds
From slavery to colonialism and school rules: a history of myths about black hair
Africa waves some leaders goodbye: but is the democratic deficit any narrower?
White men’s privilege in emerging economies isn’t measured. It should be
The five priorities South Africa’s new administration should focus on
Thinking of taking a walk everyday? Six reasons why it’s good for you
South Africa’s democracy stood up to the test: but some things need to change
Zuma’s removal was a masterstroke: can it be repeated for the economy?
How we pinned down what attracts mosquitos that carry dengue fever
Expert Database
Find experts with knowledge in:*
Want to write?
Write an article and join a growing community of more than 63,200 academics and researchers from 2,263 institutions.
Register now
The Conversation
Community
Community standards
Republishing guidelines
Research and Expert Database
Analytics
Job Board
Our feeds
Company
Who we are
Our charter
Our team
Partners and funders
Contributing institutions
Resource for media
Contact us
Stay informed and subscribe to our free daily newsletter and get the latest analysis and commentary directly in your inbox.
Email address
Follow us on social media
Privacy policy Terms and conditions Corrections
Copyright © 2010–2018, The Conversation Africa, Inc.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment