Last week Venezuela’s Maduro regime vowed to finally put an end to the nation’s economic woes by creating a sovereign cryptocurrency, the Petro. Falling oil prices coupled with years of corruption and economic mismanagement have created a toxic mixture of soaring inflation, rampant unemployment and a burgeoning underground economy.
The Petro is being touted as the single solution to all of these problems, in addition to the US financial blockade and financial attacks by “speculators”. Ironically though, the Petro may actually increase rather than decrease speculation.
A key design feature of cryptocurrencies such as Bitcoin is lack of government control and the idea of holding a currency devoid of government influence is one of the principal reasons many purchase Bitcoin. As such it’s not clear why someone would choose to hold the Petro, which will be backed by the Venezuelan government, instead of Bitcoin, Ether, Ripple, or any one of the thousands of alternative cryptocurrencies.
Collectively known as “altcoins”, these cryptocurrencies are created during an initial coin offering, or ICO, and provide plenty of opportunities for financial speculators.
Most ICOs only serve to enrich the company who concocted the coin, as well as early backers who sell their holdings before prices collapse.
Venezuela’s ICO would likely follow the same script we’ve seen play out for other altcoins: an infusion of cash flowing to those launching the coin, followed by a sharp drop in price. However, unlike other altcoins, the Petro will not provide its purchases with freedom from government control by way of compensation.
One of the main attractions of holding Bitcoin and many other cryptocurrencies is that no single entity can arbitrarily increase the currency supply and thereby dilute its value. The supply of Bitcoin presently increases at a rate of 12.5 coins every 10 minutes. Originally set at 50 bitcoins every 10 minutes, by design the rate of Bitcoin creation halves every four years.
In an attempt to render the Petro attractive to buyers the Maduro regime promises to back each coin by a basket of commodities, in this case oil, gold and diamonds. Yet this is no guarantee of value because the Maduro regime may change the basket’s contents at any time.
Throughout history we’ve seen many currencies backed by commodities. Often these currencies may be exchanged for their underlying assets, or “converted”.
Until 1931 a holder of pound sterling could exchange paper notes for physical gold at the Bank of England.
The willingness of the UK government to exchange paper for gold gave those holding pound sterling confidence in the currency’s value.
This conversion mechanism insured relative price stability, as the nation’s money supply could only be increased if holdings of gold were also increased.
So, will the Maduro regime allow holders of the Petro to exchange their virtual currency for physical assets?
Presently convertibility has not been explained, which is another reason to avoid this ICO.
At this time, many key design features of the Petro are either undecided or not clear.
The attraction of a cryptocurrency controlled by a government, let alone a government with Venezuela’s track record of economic mismanagement, is unknown. In contrast to Bitcoin, rules determining supply of the Petro are not clear.
The composition of the basket of commodities underlying a Petro has not been defined and the convertibility of the Petro has not been explained.
In addition, the launch date of the Petro is not known. At this time, the list of unanswered questions is relatively long, and specifics of the coin not clear.
But one thing is clear: there is no fundamental reason to hold the Petro except as a tool of outright speculation. Which, ironically enough, may only compound rather than solve Venezuela’s economic woes.
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