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Feb 20, 2018 | 23:35 GMT

3 mins read

Venezuela: New Cryptocurrency Can't Rescue Caracas

(Stratfor)
Forecast Update

Stratfor's 2018 annual forecast highlighted the extreme nature of Venezuela's economic crisis.  As the country's government looks for solutions to slow the decline of its finances and cling to power, it is launching a cryptocurrency called the petro. But the plan is unlikely to succeed.

The Venezuelan government is hoping that a digital approach will help it solve the country's problems. On Feb. 20, the presale of the Venezuelan cryptocurrency called the petro opened. The project, which was announced several months ago, is a novel attempt to create an oil-backed currency and circumvent Venezuela's severe shortage of foreign currency. In theory, Venezuela's government will be able to use the petro to conduct transactions beyond what its meager foreign currency reserves can manage. However, using a cryptocurrency for foreign transactions will not solve Venezuela's extreme economic problems. And the petro will quickly run into problems that will hamper its effective use in international transactions.

Unlike other cryptocurrencies, such as bitcoin, the value of the petro will be backed by Venezuela's oil reserves. The Venezuelan government will initially determine how many tokens will be available before they are auctioned off to online bidders, who may be hoping that the currency's commodity backing will make it more stable than other cryptocurrencies.

But Venezuela's government will face three major problems in trying to use the petro to access hard currency and conduct foreign transactions. First, there is the problem of scale. Venezuela's government does not have enough petros or prospective buyers to make up for the country's dollar shortage, which is driving runaway inflation and contributing to declining oil production in the country. The Venezuelan government plans to offer 82.4 million petros. But even if it could sell every one for its promised value ($60 apiece, enough to net nearly $5 billion) that would not be enough to stop the decline of Venezuela's economy in the short term when it matters most.

Secondly, U.S. buyers may have already been scared away from turning the petro into a viable cryptocurrency. In January, the U.S. Treasury Department warned would-be petro buyers that investing in the cryptocurrency could run afoul of U.S. sanctions prohibiting those under U.S. jurisdiction from trading in Venezuelan debt. This in itself would not necessarily doom the petro, which will likely be traded in some form or another regardless of the risk to its buyers. However, the warning does limit the petro's list of potential clients and, by extension, its chances of becoming more than just a curious experiment. 

Finally, though the petro is backed by Venezuela's oil reserves, the amount of its recoverable reserves is dwindling. A backing from Venezuela's self-reported 300 billion barrels of proven oil reserves looks great on paper, but the portion that can be recovered will continue to drop as the country's state oil company deteriorates due to low prices, falling production and rampant inflation. This alone will make it impossible for Venezuela to rely on the petro to bolster its strained foreign currency reserves.

The Venezuelan government will find some buyers for the petro, and the currency will — however briefly — help supplement the country's foreign currency supply. But real-world pressures will keep cryptocurrency from becoming the solution that Venezuela needs.

Editor's Note

An earlier version of this piece incorrectly asserted that the sale of every petro for its promised value would be sufficient to stop the decline of Venezuela's economy in the short term. That error has been corrected. 

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