Bitcoin appeared in 2009 as a digital currency. It was created in a decentralized form and without material backing. The trust in it rests on the security of the technological platform in which millions of interconnected computers throughout the world resolve a sequence of operations secured by a chain of encrypted ad decentralized blocks, known as blockchain.
To “mine” a crypto-currency means to resolve, in exchange for a reward, complex mathematical operations through a big worldwide decentralized network. For this reason, the exchange rate for crypto-currencies like Bitcoin is not fixed by any central bank or government, but is defined by the market.
Crypto-currencies can be transferred from one virtual wallet to another without this operation being authorized or supervised by any bank, monetary authority, or official entity. This paradigm that governs Bitcoin has been the most widely used among crypto-currencies, but now it appears not to be the only one.
Now new crypto-currencies are being announced that are backed by gold, diamonds, oil, and other natural resources. In effect, various countries are evaluating the issuance of a crypto-currency with [material] backing. The Royal Currency House of the United Kingdom announced the RMG backed by gold, Sweden is studying whether to launch the e-corona, Singapore the ubin, Estonia the estcoin, and in Venezuela the petro has been launched.
President Nicolas Maduro decreed that Field No. 1 of the Ayacucho Block of the Orinoco Oil Belt will be the backing of the petro: “In the Orinoco Oil Belt, I am notarizing with international certification in hand Field No. 1 as the base of the crypto-currency, which possesses 5 billion barrels of oil, which means a great material wealth [will be] the basis of the only crypto-currency in the world that is going to begin functioning backed by a proven, certified, and verifiable wealth,” Maduro assured.
This issuance of centralized crypto-currencies with [material] backing means a revision of the initial conceptual premises [of crypto-currencies] even though blockchain technology is still being used to issue them.
Advantages and disadvantages
Crypto-currencies like Bitcoin are not backed by concrete assets nor are they regulated by any entity. Therefore, they reflect very abrupt fluctuations that respond to a speculative logic. At the close of 2017, after unprecedented spikes elevated its price to over $20,000 per unit, Bitcoin plummeted and lost $8,000 in a matter of days, closing at around $12,000. In a speculative bubble, price is fixed in accordance with offer and demand, without any relation with a reference of value.
The new crypto-currencies backed by gold, diamonds, or oil depend on internationally certified reserves and a self-regulation that is derived from their synchronization with the price of the natural resource that backs them. It’s very probable, therefore, that a crypto-currency backed by minerals or oil will have a more stable price. Anchored to the pricing of the natural resource in the international market, its oscillations – as sharp as they may be – will not register similar spikes and tumbles.
As the use of digital payment methods is a worldwide trend, crypto-currencies stimulate the spread of digital banking in the population to the point of making common the use of virtual wallets and electronic payment systems in the most basic daily operations of buying and selling.
The case of the petro
Theoretically, crypto-currencies with [material] backing have advantages vis-à-vis Bitcoin. But in practice, a lot of doubts emerge. In the case of the petro, its use as a means of payment is limited by the obsolescence of its technological platform. It’s enough to observe the current delays in electronic payment systems.* If the petro is not widely diffused, it won’t be able to be used as a unit of account to fix prices, nor as a means of payment in selling-buying operations. Much less will it serve as a reserve value to protect the purchasing power of income and savings.
In contrast to [Bitcoin’s] decentralized scheme, President Maduro proposed the creation of farms for mining petros via the Youth Ministry. In a centralized model, miners are government functionaries who receive a salary and not commissions associated with their work. If the validation of each transaction tends to be done in a centralized and bureaucratized way, the system could collapse.
Another problem is limited access. Five percent of all the holders of Bitcoin control more than 90 percent of the total issued, and barely 25 percent of the crypto-currency is used for exchange. Seventy-five percent is destined for resale when the price rises.
If the first issuance of 100 million petros is sold on the DICOM auctions, these have to be open to the whole public and absolutely transparent. A badly administered petro will repeat the dark history of CADIVI, CENCOEX, SITME, SIMADI, DIPRO, and DICOM** in which a few privileged people were those that had preferential access to foreign currency while the majority of people and companies were excluded.
If only the rent-seekers, speculators, and corrupt individuals have access to the petro sold at a preferential rate, this would be equivalent to a fire sale of oil at a shameful rate. At $50 per barrel, the price in bolivares at the DIPRO rate of a barrel of 159 liters equals 500 bolivares, not even 3 bolivares for every liter of oil.
The issuance of the petro could mean the dollarization or the yuanization of the Venezuelan economy. The government announced that the petro is equal to a barrel of oil. If this is priced in yuans, the 5 billion barrels in Ayacucho Field at a price of 378 yuans per barrel would amount to 94 billion yuans that would be auctioned on the DICOM, initiating a growing influence of the yuan in Venezuela. And if it’s priced in dollars, the 5 billion barrels would create 2.5 billion dollars, which would maintain the predominate influence of the dollar in the Venezuelan economy.
There are also doubts whether the petro is really exchangeable. No common citizen or great investor will want to buy petros if later they can’t exchange them for other crypto-currencies, foreign currencies, or their backing in oil. When the US dollar was governed by the gold standard, economic agents could take their dollars to a bank and exchange them for gold, but this standard failed when the US government refused to do it.
However, dollars circulating throughout the world still have backing in the immense range of goods and services produced by the powerful US economy. Venezuela has an increasingly precarious productive apparatus and a heavily indebted oil industry on the brink of collapse. With what oil or products can petros be exchanged for in the event that their backing is demanded?
Finally, if a large part of the issuance of the 100 million petros that has been announced is bought by countries like Brazil, Russia, India, China, or South Africa, this could be interpreted as a forward sale of oil or the issuance of external debt, as long as the petros have as their guarantee the Ayacucho Block of the Orinoco Oil Belt.
We can’t forget that any of these countries which buys petros can demand their backing in oil. So it’s worthwhile to ask the question: Is the petro a forward sale of oil or an external debt backed with oil?
* Due to nationwide shortages of cash, Venezuela’s electronic credit and debit systems have become severely overburdened, leading to delays in card processing that can last up to five minutes during bi-weekly payment periods.
** DICOM is the latest foreign exchange system unveiled by the Maduro government with aim of making foreign currency available to Venezuelans via public auctions in a bid to undercut the black market. The author argues that if the petro is not properly regulated to preserve transparency, it could repeat the errors of DICOM and previous foreign exchange mechanisms (CADIVI, CENCOEX, etc.).
Translated for Venezuelanalysis by Lucas Koerner.