On January 23, 2018, the Venezuelan government, led by president Nicolás Maduro, revealed additional information about the presale of the petro. According to cryptocurrency superintendent Carlos Vargas, the government will accept hard currency or other cryptocurrencies in exchange for the oil-backed digital asset, but not bolivars.
In simple terms, a "hard currency" is a form of payment for goods and services that is expected to remain relatively stable. There isn't a formal definition, but examples might include the US dollar, the euro, or the Japanese yen. Internationally, businesses and investors accept these currencies with a high degree of confidence in their sustained value. They stand in stark contrast to cryptocurrencies as a whole.
In "Hard Currency and Financial Development," Brazilian central bank president Ilan Goldfajn and Roberto Rigobon, professor of applied economics at the MIT Sloan School of Management, provide insight into the nature of a "hard currency." The "hardness" of a currency, they write, "could be defined as the willingness of international agents to hold the currency, as measured by its actual use in cross border financial positions."
Venezuela's currency, the bolivar, would not pass the litmus test as a hard currency.
Over the last year or two, the bolivar has been devastated by inflation. As of last week, a 20 bolivar note is equal to approximately $0.0001, a miniscule denomination that we're probably more accustomed to seeing in cryptocurrency markets. In fact, the Venezuelan currency has become so worthless that people are literally leaving it in the streets – living in the US, it's tough to imagine that degree of economic dysfunction.
As hyperinflation spirals out of control, it's easy to understand why the Venezuelan government will not accept bolivars for the petro. One theory is that the embattled government is attempting to stockpile an assortment of currencies that have reliable underlying value.
If a secondary market for the petro arises (assuming it launches successfully, which seems quite unlikely), Venezuelans could conceivably purchase petros using bolivars. But, it's hard to say how much faith Venezuelans would put in the petro. To this author, that seems like relinquishing a large part of your financial future. Even if the bolivar is worthless, at least it's tangible. With the petro, there's no telling what will happen with regard to its price or management.
This past week, the Peterson Institute for International Economics published "Venezuela's Ill-Advised 'Cryptocurrency' Scheme: An Update," continuing to decry the petro and raising further questions about the feasibility of the government's plan. Senior fellow Monica de Bolle and research fellow Martin Chorzempa write that the Venezuelan government's proposal "combines serious misunderstandings with wishful thinking about the benefits of blockchain technology, along with evidence that the government is either trying to fool its populace or that it does not understand the basics of cryptocurrencies, or both."
ETHNews previously reported on the US Treasury Department's warning that American investors could face "legal risk" if they purchase the petro. This is because the asset would "appear to be an extension of credit to the Venezuelan government," in violation of US sanctions.
Finally, just a couple of notes:
- Yesterday, the Venezuelan government denied reports that a private placement for $2.3 billion of the petro could sell at a 60 percent discount.
- Through Carlos Vargas, the Venezuelan government decreed that mining activities are "now perfectly legal." It's unclear how far this allowance extends.