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The Petro; the first bloodcoin

The Petro; the first bloodcoin

There are few countries that have experienced the turmoil of Venezuela in recent years. A once burgeoning country, formerly the richest in Latin America, has now descended into a dystopian nightmare; citizens forced to raid zoos in search of food, basic items such as toilet paper unavailable, hyperinflation running into the thousands of % and an increasingly autocratic government that has led to nearly 1 million Venezuelans fleeing to neighbouring countries in the past two years.

The hows and whys of Venezuela’s descent from oil superpower (it has the largest reserves of oil in the world, holding c. 20% of the global total) into economic basket case is beyond the scope of this article. It is hard to conceive of a country that better serves as an illustration of gross mismanagement, a nation utterly betrayed by those supposed to protect the interests of its citizens.

In part it is due to the ‘Dutch disease’, the ‘Resource Curse’ theory which contends that resources are an economic curse that often leaves countries poorer and less developed than those with fewer natural resources. It also promotes the idea that resource rich countries are frequently more authoritarian, and struggle to move to a more democratic system.

It is also because of the election and ensuing reign of Huge Chávez in 1998. His election, based on promises to improve the lot of the common person, unleashed a decade plus run of improving living standards and turning Venezuela into one of the most prosperous countries in the region. Under his regime GDP grew more than fourfold from 1998 to 2012, whilst the Gini coefficient (a measure of income inequality) dropped from .495 to .39 in the same period – second only to Canada in the Western Hemisphere. 95% of Venezuelans became literate, one of the highest rates in the region.

Increasing authoritarianism

These improvements warded off criticism of the increasingly autocratic nature of the Chávez administration. In the first year of his regime the constitutional assembly voted to give themselves the ability to abolish government institutions and subsequently declared a ‘judicial emergency’ which it used as the pretext to overhaul the judicial system. Freedom ratings, civil liberties and political rights rose from 2.5, 3 and 2 respectively (with a scale of 1=Free, 7=Not Free) to 5 from 1998 to 2013. Human Rights Watch reported in 2008 that the President had presided over a decade of dismantling the judiciary and restricting the freedom of the media. The United Nations noted that there were 31,096 complaints of human rights violations from 2011-2014 in the country.

Chávez would die in 2013, with Vice President Nicolas Maduro assuming power and unleashing a vicious cycle of problems that would destabilise the country. Even prior to Chávez’s death the cracks were beginning to spread, as inequality began to rise with worsening living standards whilst crime and corruption soared. By 2013 Venezuela had the second highest inflation rate in the world, (56%), sitting only behind war torn Syria.

By this point, the importance of oil to Venezuela’s economy had reached extreme levels, measuring approximately 95% of total exports as opposed to just 50% in 2000. Just as the country could least afford it, oil prices collapsed in 2014. Combined with inefficient oil production due to years of negligence and corruption, Venezuela would be plunged into a crisis with seemingly no end. The average weight loss in the past 12 months is 9kg. Murder and infant mortality rates are worse than ever. The country’s minimum wage is around £3 a month.

It is into this whirlwind of contributing factors that Maduro would announce the first ever sovereign backed cryptoasset.

The bloodcoin

The ‘Petro’ would be supposedly backed one barrel of oil from a Venezuelan oilfield and aims to raise c. $5bn. It is also a joke, nothing more than a mere visage of a cryptoasset.

For one, it is merely a claim on oil that is as yet unmined. Owners of the Petro have no ability to actually redeem their Petro for a barrel of oil. They are relying on the state owned and failing oil company PDVSA to mine the oil, a company which has defaulted on existing debt obligations already and which has been run as a personal ATM for the ruling establishment for years.

Secondly, you can only buy the Petro using foreign currencies (the country doesn’t want the worthless Venezuelan currency), but you will have to sell to the bolívar and you will have to do so at a government assigned exchange rate. The only ‘use’ of Petro is to use it to pay Venezuelan based taxes, making them essentially worthless.

Thirdly, it’s simply not a cryptoasset in any real sense of the word. It will be either an Ethereum or NEM based token (the whitepaper seemed unclear as to which, containing references to both) but the government has already said that it will set up mining farms across the country. This sums up the futility of the Petro. A country which cannot feed its own people is setting up energy intensive mining farms to ‘protect’ a cryptoasset that is of no value, and in doing so is ensuring that the operation will be completely centralised (although given the autocratic nature of the government, this is probably the least surprising detail).

As if to hammer home this centralised network, the government also laid out a new entity, the ‘Registry of Cryptocurrency Miners’ through which anyone intending to mine the Petro will have to register. The whole point of mining is for decentralisation; having the entire network being mined by one entity in one country where non government users must register for licensing is preposterously ridiculous, particularly given a recent trend of arresting Bitcoin miners.

A terrible and troubling investment

Of course, there is a reason for this. The Petro is not intended to be a cryptoasset. It is a simply a means to circumvent Venezuela’s issues with EU and U.S. sanctions. Banks cannot touch Venezuela, and as such the country has no means of raising capital. Into this breach steps the murky world of cryptoassets, where no idea is too stupid or too ethically ambiguous as to deter investors.

Maduro has claimed that the Petro’s presale raised $735m. That seems highly unlikely, unless it is being provided by Venezuela’s few remaining global allies such as China who already hold significant amounts of Venezuelan debt. Investing in the Petro would be an abysmal decision for individual investors. It requires putting your trust in a government that has shown itself to be void of any such faith (and there is a brilliant explanation of all of Maduro's deception solely relating to Petro here). The whitepaper is contradictory and few details have been provided about the system. There is no means to redeem the currency unless it is listed on exchanges – and given the U.S. has warned investors they are potentially in breach of U.S. sanctions if they invest in the Petro, it is highly unlikely any exchange is going to take the risk of goading U.S. regulators for such little gain.

Venezuela’s National Assembly, which is controlled by the opposition, claimed that the issuance violates constitutional requirements and would be considered null and void should Maduro leave office, increasing the risk to investor’s chances of recouping their investments.

It is also one of the few cryptoassets that crosses a basic ethical boundary. Even if you believe that the crisis is one borne of U.S. and Western interference, the Petro is merely a capital raise designed to be nothing more than a temporary reprieve to allow the current government to keep their grip on power which will prolong the suffering experienced by millions of people. The crackdown on civil and political liberties continues unabated.

For a country with just $9.3bn of foreign exchange reserves, potentially raising $5bn would be a potentially game changing development. This is not sensationalist. It is hard to overstate the level of the crisis facing 31 million people. People are starving, dying, being forced to flee their country. There are so many exciting projects in blockchain that offer far better investment opportunities. Do not fall for a cash grab by a desperate and corrupt government dressed up as a forward-thinking project.

The difficulty of valuing cryptoassets

The difficulty of valuing cryptoassets

Part 2: Blockchains are broken, here is why

Part 2: Blockchains are broken, here is why