Corporate Debt Review

Venezuelan Petro a Desperate Move

Petro-Mania?

The recent launch of the Petro (PTR) cryptocurrency is hardly the remedy proclaimed by Venezuelan President Nicolas Maduro. Of course, on further examination the digital move is really targeted to bypass US sanctions. That it may also contribute to the accelerating collapse of what is left of the Venezuelan economy is apparently of less concern.

And so goes the current logic of a government under desperate financial siege.

On February 20, Caracas made available 82.4 million coins in a private presale. In all, Maduro has proclaimed that 100 million coins will be available, valued in the aggregate at a bit more than $6 billion. Within 72 hours Maduro claimed that over 800,000 had been sold, despite there being absolutely no way of authenticating any of this.

'El Petro," Venezuela's new crude oil-backed cryptocurrency. Photo source: Telesur

‘El Petro,” Venezuela’s new crude oil-backed cryptocurrency. Photo source: Telesur

Then there is what kind of coin the PTR is. Once again, it would seem, there is scant information provided. My sources have claimed that it is an ERC20 fork. In other words, this is being developed off of the Ethereum token standard. Yet it does not have any miners and may not yet be part of the ERC20 blockchain network.

We know this last bit of information because Carlos Vargas, the Venezuelan official responsible for the coin’s administration, has declared the government is seeking miners. And then there is the way in which the digital currency can be used.

According to Vargas, “The Venezuelan cryptocurrency will be redeemable for fiduciary money and other cryptoassets through digital exchange houses (to be determined). Its price will be associated with that of the Venezuelan crude oil basket because the state will accept the payment of taxes, obligations, contributions and national public services in Petro.”

$#itcoin

But the Petro does not have any genuine exchange value. Because, aside from what is meant by “fiduciary money,” notice what else the statement does not say. The PTR will not be exchangeable for local currency (the bolivar) … or any other currency for that matter. That would guarantee an immediate “contribution” to an already underway spiraling inflation and foreign exchange crisis.

How “taxes, obligations, contributions, and national public services” – which are denominated in bolivars — are to be satisfied without any actual exchange mechanism remains to be seen.

According to the instructions provided for the presale, participants need to establish a Petro wallet. That generates an email address that allows for the receiving and depositing of PTRs. The limited redemptions permitted also are to take place via the same email address.

And then there is this.

Each PTR is supposed to be backed by a barrel of oil from national company PDVSA. That provides the

Venezuelan president’s calculation used to arrive at a value of about $6 billion. Of course, that values the coin at a market price of about $60 a barrel, even though the crude serving as collateral is heavy oil and trades at a significant discount either Brent or WTI.

Forget also that the digital currency venture has been rejected by Maduro’s own hand-picked national legislature, while opposition leaders have declared it blatantly illegal. In response, Vargas has declared it is quite legal. He adds that the nation’s Supreme Court will confirm it. No indication yet as to when that court pronouncement will take place.

Secure, Transparent Fraud

The PTR is the first national cryptocurrency to be backed by a commodity. That would be an intriguing addition to the cryptocurrency world if not for that fact that that same underlying commodity in question has already been used to collateralize several other transactions.

Both PDVSA and national sovereign debt (both now in technical default) are dependent upon oil export revenues, as are fruitless attempts to shore up the bolivar and a central budget barely on life support, provide the central bank with at least the appearance of being able to control forex, subsidize essential imports, maintain terminal/storage contracts elsewhere, and provide necessary operating capital to keep PDVSA fields and support services operating.

Using the entire collateral book value of a single property several times over to procure separate loans is fraud. That would certainly end up in an indictment. Just ask some of the people in the DC news these days. On the other hand, sovereign governments certainly appear to think otherwise.

But the kicker is this. Unless Maduro can transfer all, or at least the majority, of these other obligations into PTR, the digital currency will collapse in value. You cannot pretend apples are oranges, especially if the orchids have already been committed elsewhere.

In the final analysis, as every detached observer I know has concluded, the Petro is a political attempt to circumvent US sanctions. Even Maduro effectively declared it as such during a mid-February press conference.

There is yet another wrinkle. Caracas may be hoping to tap into worldwide funding streams from undocumented and unsavory transactions. Quite a foundation for transacting business in a country’s only genuine resource.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.