Venezuelan oil cryptocurrency is giving Blockchain a bad name

Venezuelans are faced with a terrible choice:

  1. Continue shopping using the almost useless country local currency, the bolivar.
  2. Go to the black market and buy US dollars.
  3. Escape from the country.

It happened that way because the country's leader, Nicolás Maduro, made some pretty dire economic decisions. First, he put all the (cheap) eggs of Venezuela in a notoriously rugged basket: oil. The country has always had a lot, but for a long time it was only one of the many resources exported from the country, along with products from heavy industry (steel, aluminum, cement) and agricultural products such as rice and corn. By 2017, however, oil had taken over, accounting for 98% of the country's export revenue. And when the price of oil plummeted in 2014 (from $ 115 to just $ 35 a barrel), the Venezuelan economy also collapsed.

Basically all domestic activities have been very successful – imported goods cost more, so local businesses have been forced to charge higher prices, even for basic necessities. People could afford less, so they spent less money, which meant that the government made less money with tax revenues. And instead of raising interest rates or reducing their expenses, the government took exactly the wrong way: print more money.

And so the inflation process started. Hyperinflation – an extreme form of inflation in which the value of a currency jumps erratically – has gripped the country since the beginning of 2018. And it is only expected to get worse: by the end of the year predicts that inflation hits a staggering 1,000,000.

In 2017, a sack of rice cost 8,000 bolivars. Just last week, the price would have been well over 9 million bolivars.

In 2017, a sack of rice cost 8,000 bolivars. Just last week, the price would have been well over 9 million bolivars.

About 15% of the population are desperately fleeing an economic crisis. Crime rules the streets, while critics of President Maduro's authoritarian regime are threatened with political persecution.

It is, unfortunately, a characteristic situation of a rapidly collapsing economy. The bolivar is quickly becoming useless. It is logical, therefore, that people turn to more stable alternatives like the US dollar traded on the black market, or even to trade for goods and services.

In a desperate attempt to stop the spiral of hyperinflation, Maduro has recently introduced a new currency called "sovereign bolivar". To be clear, the "sovereign bolivar" is simply a rebranding of Venezuela's previous currency. The only real difference is that its value simply had five zeros thrown at the end – in other words, something that previously was worth 1,000,000 bolivars is now worth only 10 sovereign bolivars. But its value will also be linked to petro, a state-funded cryptocurrency that was launched in February (the previous bolivar was loosely linked to the US dollar).

This change will not do much to help the Venezuelans, Steve Hanke, a professor of economics applied to Johns Hopkins University and a leading expert on hyperinflation and exchange regimes, tells Futurism. "The removal of zeros and the introduction of a new currency with a new name do absolutely nothing, it is a type of cosmetic change." A few days after the devaluation, thousands of companies have temporarily closed to understand how to adapt to the " sovereign bolivar ", according to BBC .

The petro (the cryptocurrency to which the sovereign bolivar is bound) is doing something revolutionary, however – it is one of the first attempts to introduce a cryptocurrency supported by the state. If the situation were different, Venezuela could provide a promising model for other nations wishing to switch to a blockchain-based currency. But that's not what will happen in Venezuela. Instead, the petro could become a cautionary tale that could discourage other nations from introducing similar state-supported cryptocurrencies.

Image Credit: Victor Tangermann / Getty Images

The Petro

The whole point of introduction of the petro was to stimulate a sick economy. It probably will not reach this goal. This is partly because, as a cryptocurrency, oilmen lack many of the elements that make cryptocurrencies work: transparency and decentralization without a central authority setting prices.

Most cryptocurrencies are volatile because their value is linked to how many coins there are, and how popular that coin is – in other words, a classic case of supply and demand. This is why Bitcoin's value has had a lot of money in the last year – people bought it, then worried that its value would be accumulated thanks to the bad press, and it sold a po & # 39;

The Venezuelan government, however, decided to tie the value of oil at the cost of a barrel of oil (about $ 60). The positive side, which makes the petro more stable than the average cryptocurrency (although the Venezuelan government can change the value at any time because it controls so much oil). But it also means that a decentralized investor market, if someone decides to buy the petro, would have no effect on the value of the petro.

The government scheme shows a fundamental misunderstanding about how the blockchain works.

The government scheme shows a fundamental misunderstanding about how the blockchain works. The white paper of the currency, published by the Venezuelan government in February, did not offer much clarity. Typically, a white paper describes in detail the structure and support of a certain cryptocurrency, but the petro paper is too complex to enchant a part of it. According to the newspaper, the petro is a "sovereign crypt thirsty for oil and issued by the Venezuelan state" to "drive for [sic] the development of an" independent, transparent and open digital economy "for all its citizens. [19659011] What does not tells us, as indicated by hackernoon: how a petro could be redeemed for a barrel of oil – a dazzling omission that eventually makes the coin appear damn sketchy.

And that's what international experts saw when they read the newspaper, calling immediately the petro to be a "fraud" intended to circumvent international sanctions and access foreign markets.

"If you read the white paper, it's internally inconsistent – smoke and mirrors, vague and so on," says Hanke.

Who buys it?

The initial offer of coins (ICO) for the petro was as mysterious as the announcement of the coin – no transparency or investor confidence here. Hoping to sell about 38.4 million Petro tokens (worth about $ 6 billion) to support the rapidly devaluing bolivar, Maduro offered the first investors a 60% discount to boost trade. This, however, ended up making the whole launch even richer in fish. The government has announced that it has made 3.3 billion dollars in pre-sale, but this number has never been verified by any independent organization, and the Venezuelan government has been (characteristically) clenched on the Petro by its ICO .

on sale day, petro raised $ 375 million as part of a "private sale" report Reuters . But even now, six months later, we have no idea who bought so much petro. Some suspect that the buyer is Russia. After finding evidence of shady bonds between Venezuela and Russia, TIME defined the petro a "semi-hidden joint venture."

The rest of the world is not exactly rooting for the petro. US President Donald Trump has banned all US citizens from buying any Venezuelan petros, calling the effort "another attempt to support the Maduro regime, while further looting the resources of the Venezuelan people," a Department spokesman said of the Treasury Reuters in January. Without official support from the international community, it will not have much chance of becoming legally legal (if it also exists beyond some shady deals in the first place).

No blockchain expert in the world could make an accurate hypothesis about how the petro is now, or if it is even used.

"[The petro] will be another of these things that gives a bad name to the whole notion of cryptocurrency," says Hanke. "There is already enough of these frauds out there in the sphere of cryptocurrency, and the petro will be just another."

"[The petro] will be another of these things that gives a bad name to the whole the notion of cryptocurrency. "

Frankly, it is not even really important, because in reality no Venezuelan uses the petro. "We have not seen a single Petro in circulation, neither his smart contracts, nor the rules of the token, nor his blockchain," says Jorge Farias, CEO of the Venezuelan startup Cryptobuyer, a cryptic Latin American exchange Wired .

"It does not trade, it's a fiction, nobody uses it, so the whole thing is a scam," says Hanke.

And nobody seems likely to start using it. Despite Maduro's attempts to use petro to stabilize a free-fall economy, hyperinflation has not slowed down at all. But Venezuela is not yet out of options.

Dollar For Escape

If history is an indication, there is really only one way out of the spiral: the US dollar. In fact, despite what the government wants the international community to believe, Venezuelan citizens have already moved away from the bolivar. "The dollar has already replaced the bolivar for all practical purposes, but not officially – [Venezuela] is not officially dollarized," Hanke says.

"Dollarization" (or "currency substitution") is the process of replacing the current local currency with a still much more stable, such as the US dollar, the euro, or even the dollar. gold. A lot of experts outside the country are all about to dollar the Venezuelan economy because it was the only thing to stop other countries as they suffered a free economic fall.

"Dollarization is the only way to immediately stop hyperinflation," Hanke says. For example, in 1999 he advised the president of Yugoslavia to replace the Yugoslav dinar with the German mark. And his dollarization plan had an immediate effect. "Everything is literally settled in a few hours."

Does petro ever become a functional currency? Hanke doubts it. "You're talking about something in theory and not in the real world … The petro does not exist That's why the whole thing is a scam … You're just talking about a theoretical idea that's written and conceived so badly "And this fact should not surprise anyone. "This is more for the Venezuelan government than anything else."

"You're talking about something in theory and not in the real world.The petro does not exist .That's why the whole thing is a scam.

For cryptocurrencies based on blockchain like petro, even if they have a chance at the national level, they need a central authority that holds enough anchorage reserves (US dollar, Euro or other) to back up. "The world of cryptocurrencies will be successful in the long run only if they are organized as a currency board, "says Hanke, a currency board acts as a central authority (instead of a central bank) that takes decisions on the exchange rate – allows unlimited exchange of local currency and can only add more local currency if it has an equal amount of foreign currencies. "Until then, these cryptocurrencies are not just currencies. They are highly speculative assets but they are so volatile that they are not stable units of account, "says Hanke.

Who knows, the world may not yet be ready for a national currency based on blockchain, but the Maduro petro is not a good rating We are actually a cautionary tale of misunderstanding a very powerful technology. Instead, the Maduro government is using the petro to distract the international community from economic instability, from the diaspora and from political unrest of the The condemned oil experiment should not prevent other nations from betting on a national cryptocurrency, but it could very well.

More on Venezuelan Cryptocurrency: Trump & # 39; s Shady Ban of Venezuela & # 39; s Shady Cryptocurrency, Petro function: Pretty Shady

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