Venezuela, the South American state made history as the first nation-state in the world, to officially and comprehensively adopt and implement the cryptocurrency technology. Earlier, a certain of nation-states have either contemplated or altogether started their own national cryptocurrencies, but not in the way that Venezuela has its own national fiat cryptocurrency and launched an Initial Coin Offering (ICO). Estonia, with the “estcoin“, Russia with “cryptoruble“, Dubai with emCash and a number of others come in handy. Of late, the United Kingdom (UK) intensified its cryptocurrency research effort and central banks across the world are contemplating as well the Central Bank Digital Currencies (CBDCs). The apprehension is the unforeseeable or barely foreseeable impact that the cryptocurrency technology may have on monetary policy and financial stability.
First announcement that Venezuela would mine a national fiat cryptocurrency and do a token launch was made in December, 2017. It is still early days in the development and growth of the financial technology cryptocurrency. Therefore, few nation-states utilise their fiat currencies to finance research and develop the cryptocurrency phenomenon at this time.
Nation-states, and corporates would rather finance research and develop the technology that underpins the cryptocurrencies. This technology is called blockchain; a chain of blocks of transactions secured with cryptographic encryption. As a Distributed Ledger Technology (DLT), this digital ledger blockchain has a number of features and functionalities that primed it for mainstream adoption by governments. It can ensure transparency, accountability, trustlessness, data immutability, real-time time-stamping, create auditable trails of cryptographic proofs, and decentralisation across nodes all over the world.
Cryptocurrency is a more advanced financial tool than the legacy fiat currency. It is the next stage of monetary policy evolution—deflation. As a deflationary currency, cryptocurrency is the direct opposite of fiat currency, an inflationary currency. With cryptocurrencies, a “digital system of transaction” is cryptographically secured. Cryptocurrency transactions are impervious to the traditional vulnerabilities often found with online finance such as “hacking of online accounts and counterfeiting payment authentication”. The public and private key cryptography cybersecurity infrastructure of cryptocurrency can only, and somewhat be vulnerable to quantum computing, the full-scale evolution of which is arguably expected within the next decade.
This article critically analyses the el petro as the first experimentation with cryptocurrency by the sovereign government of a nation-state.
El Petro the fiat cryptocurrency
Venezuela introduced el petro (petromoneda), the national fiat cryptocurrency, nine years after the invention of bitcoin; first decentralised cryptocurrency to reside on the blockchain. El petro as a stablecoin is backed by Venezuelan oil resources, diamond and gold reserves. There are 100,000,000 (one hundred million) units of el petro backed by 100,000,000 (one hundred million) barrels of oil reserves. Each barrel sells for USD67.70 at the international oil market. Therefore, one el petro (1 PTR) sells for USD67.70 at the token sale.
With the el petro offered for sale at an Initial Coin Offering (ICO), Venezuela seeks to raise $5billion, which would go into its sovereign wealth fund. This here explains the international response and success, though arguably in terms of the $5billion which the Venezuelan government claimed was raised:
“The Petro, the digital currency backed by Venezuela’s oil and mineral resources, received more than 186,000 offers of certified purchase from 127 countries, according to Maduro. The buyers included 3,523 entrepreneurs and 83,000 individuals. He added the government had received offers for a total of 82.5 million Petro units.
Last month, Maduro boasted that the virtual currency generated $735 million on the first day of it presale.”.
Like bitcoin, el petro is a decentralised fiat cryptocurrency. But unlike bitcoin, it does not have its own blockchain. El petro is an ERC20 token based on the Ethereum Virtual Machine (EVM), and hosted therein. It has been criticised as undermining other cryptocurrencies and international sanctions.
The presale of el petro opened on the 20th February, 2018. Any individual and corporate from any of the 194 nation-states of the world can make a purchase of el petro at the site, subject to Know Your Customer (KYC) procedure and Anti-Money Laundering (AML) measures.
Complete with buyer’s manual on the el petro token presale site, the prospective individual token buyer‘s email, name, digital copies of identification document, passport, telephone number, and country of residence are required to make a valid purchase. Furthermore, the individual buyer of the el petro is required to indicate whether the el petro token is being bought with another cryptocurrency or a foreign fiat currency, and the maximum amount being bought. At the last part, it is boldly written as an AML measure to ensure that source of fund is legal:
“I declare that the source of fund is lawful”.
For corporates buying the el petro token, digital copies of statutes of constitutive document and tax information registry are required. Further requirements for this corporate category to make a valid purchase are email, name of representative, name of the company, identification type, identification, country of residence, telephone number, the type of buying currency—cryptocurrency or a foreign fiat currency, and the maximum amount to be bought. Also at the last part, the boldly written AML measure is repeated.
Bolívar the fiat currency
The new fiat currency replaced the original bolívar. This fiat currency has been in use for financial transactions in Venezuela since January, 2008. Central Bank of Venezuela (Banco Central de Venezuela, BCV) issues and maintains fixed exchange rate for bolívar. A fixed exchange rate, sometimes called “pegged exchange rate” in the basket of currencies, is the currency value fixed against the value of another currency, or against a measure of value in the mode of gold.
Economic sanction and inflation in Venezuela
United States (US) and European Union (EU) imposed financial blockades and sanctions on Venezuelan economy and some of its officials, even in the face of extensive foreign policy academic research that sanctions are rarely effective, and that tested and recommended strategy is the carrot and stick approach. On the announcement that Venezuela would mine own national cryptocurrency and do a token lunch (otherwise known as “Initial Coin Offering”), there was no instant foreign policy reaction from the United States. After the el petro token sale went live, the United States banned its citizens from its purchase.
Going by the majority of sentiments expressed, possibility of circumvention of the financial sanctions with the cryptocurrency el petro gave rise to the ban by the United States. There is an apprehension on the part of the United States that Venezuela could use the fiat cryptocurrency to circumvent sanctions and escape the harshness of its economic situation.
Venezuela cannot raise bonds and securities in the regular financial market, having defaulted, and thus failed to meet both short-term and long-term financial obligations. But with the el petro, Venezuela hopes to complement its sources of foreign exchange earnings, recover the economy, and ultimately access the international cryptocurrency market.
Venezuelan economy suffers quadruple digits inflation, as the bolívar price plunges into an all-time low, because of the unchecked money supply expansion and ensuing financial sanctions by the United States and the European Union (EU). Resource mismanagement, deeply fragmented socialist system, falling oil prices and monocultural economic fixation have been other causes of the collapsing socio-economic order in the Bolivarian country. Sky-rocketing commodity prices have occasioned mass exodus of hundreds of thousands of Venezuelan citizens, to save themselves from the critical human condition.
Deflationary currency standard
With bitcoin enters the era of deflationary currencies, where there exists, a predetermined number of cryptocurrency programmed to be mined within a particular period of time. These cryptocurrency units do not need the government to underwrite them—but that is a potentially critical situation that speaks to the general, global regulatory uncertainties. As earlier noted, cryptocurrencies thrive on cryptography and mathematics. According to Russ Roberts:
“Elaborate controls to make sure that currency is not produced in greater numbers is not something any other currency, like the dollar or the euro, has…That is considered very destructive in today’s economies, mostly because when it occurs, it is unexpected…In a Bitcoin world, everyone would anticipate that, and they know what they got paid would buy more then than it would now.”.
Bernard W. Dempsey, S.J. leads credence to the above in the following words:
“A fixed money supply, or a supply altered only in accord with objective and calculable criteria, is a necessary condition to a meaningful just price of money”.
Bitcoin thrives on a fixed money supply algorithm. The number of bitcoins that would be mined is 21,000,000 (twenty one million). The last bitcoin would be mined on the 7th May, 2140. Other cryptocurrencies equally have a predetermined number to be mined—cryptocurrencies and tokens follow this deflationary protocol in general. Bitcoin is an instructive example that cryptocurrencies are not mined indiscriminately as would fiat currencies. Fiat currencies are manipulated for quantitative easing purposes to “lower interest rates and increase the money supply”, all in an effort to effectively manage and control inflation. In Quantitative Easing (QE), the central bank creates money, and uses it to buy up financial assets in the securities market. This increases the money supply, and stimulates the weak economy.
El petro is a cryptocurrency, and therefore designed to be deflationary. After the mining period, and scarcity hits hard, el petro skyrockets in value. This value appreciation is likened to the gold value after its mining diminished. Another additional advantage of el petro is that as a fiat cryptocurrency, it is a stablecoin—asset-backed.
Bolívar as an inflationary currency
The bolívar as a fiat currency, and like all fiat currencies, is an inflationary currency. With the quadruple digits inflation, worst hit in its history, it got so bad that the Venezuelan government plans to eliminate the physical currency bolívar, in order to alleviate cash shortages, which has crippled the Latin American country’s economy. The bolívar currency denominations have become high currency denominations with almost zero purchasing power and exchange value. Bolívar loses 9.99% of its value in two years.
In the words of Prof. Steve Hanke:
“hyperinflation occurs when the monthly inflation rate persists above 50% for 30 consecutive days. Monthly inflation in #Venezuela is 134.55%, day 27 over 50%”.
Trillions of worthless bolívars in banknotes have been printed to escape runaway inflation rate, while the money supply doubled between March 2016 and March 2017. Yet the situation would exacerbate rather than ameliorate. The more bolívares are printed, the more the cost of living, goods and services skyrocket. This, in essence, causes fiat currency price instability and affects the economy as a whole. Low-value banknotes have been rendered outdated in the Venezuelan economy, because of the hyperinflation.
According to economic data released by the Venezuelan National Assembly, and supported by figures from independent economists, the annual inflation rates in commodity prices have risen 4,068%, and the bolívar down 40% in a single month against the dollar.
With Venezuela leading the way for nation-states in the comprehensive adoption of the cryptocurrency technology, the coast becomes increasingly clear that in no time, the unsustainable inflationary currency system upon which the global economic infrastructure is built may hold no longer.