The Venezuelan state launched a cryptocurrency Tuesday designed to circumvent U.S. and European sanctions. Called the petro, the digital currency is pegged to the country’s oil reserves.
With its currency devalued, inflation on track to hit 13,000 percent by the end of 2018, and citizens experiencing food and medicine shortages, Venezuelan President Nicolas Maduro launched the digital coin hoping to raise foreign investment.
"Petro is born and we are going to have a total success for the welfare of Venezuela. The largest and most important companies and blockchain in the world are with Venezuela; we are going to sign agreements,” Maduro said at the launch.
According to Carlos Vargas, the man charged with overseeing the experiment, there has already been interest from Qatar, Turkey, and the Middle East, and even the U.S. and Europe.
But the scheme, first announced in December, has been widely ridiculed as a scam.
“Anyone who would waste money on such an obvious sham is a fool,” Steve Hanke, an economics professor at Johns Hopkins University, said. “Maduro's ‘petro’ is just another elaborate pump-and-dump scheme.”
How does it work?
The petro is built on the ethereum blockchain.
All 100 million petro tokens will be offered for sale in an initial coin offering. Maduro has said previously the fundraising effort would be worth $6 billion — making it the biggest ICO ever.
Unlike almost all cryptocurrencies, the petro will be backed by a tangible asset, in this case a barrel of oil.
During the pre-sale, which kicks off Tuesday, 82.4 million coins will be sold at a heavy discount in order to attract investors. The rest of the coins will go on sale next month.
How will it be used?
Maduro envisions the petro being used as an alternative to the country's fiat currency, the bolivar, which has been devalued in recent years.
According to the project’s website, the government is guaranteeing the petro can be used “as a form of payment for national taxes, fees, contributions and public services.”
The value will be based on “the previous day's Venezuelan oil basket price with a discount.”
The petro can be exchanged for fiat currency — such as U.S. dollars — but not initially for the bolivar.
Why the petro?
The reason for the introduction is to help the country avoid the sweeping economic sanctions imposed by Washington and Brussels, allowing it attract new investment.
But some critics say that sanctions are not the reason the country’s economy is collapsing.
“The main reason Venezuela can't raise financing is that macroeconomic finance is a shit show,” Francisco Toro, a Venezuelan journalist, told CNBC
Opposition leaders in Venezuela have been critical of the project, with the opposition-led Congress claiming the cryptocurrency is illegal as it is effectively borrowing against the country's oil reserves.
“The [petro] is tailor-made for corruption,” legislator Jorge Millan said. “This is not a cryptocurrency, this is a forward sale of Venezuelan oil.”
The cryptocurrency industry has been equally unenthusiastic about the new issuance, with many watchers predicting that without widespread adoption by Venezuela’s population the petro will quickly disappear.
“Although it is allegedly backed by the price of Venezuela’s oil reserves, there is no reason why a rational investor should put money into it,” Daniele Bianchi, an assistant professor of finance at Warwick Business School, told VICE News. “It looks more an attempt to raise funds out of desperation than an actual attempt to re-introduce a digital currency backed by a hard commodity.”
But not everyone is pessimistic.
“By putting the entire economy on a decentralized blockchain, Nicolas Maduro is actually opening up the books,” Mati Greenspan, senior market analyst at social trading firm eToro, said. “Every person on the planet will have the option to scrutinize every transaction with indisputable evidence.”
U.S. Senators Marco Rubio and Robert Menendez denounced the petro last month, warning the Treasury it needs to be “equipped with tools and enforcement mechanisms to combat the use of cryptocurrency to evade U.S. sanctions in general, and in this case in particular.”
Will others follow?
Russia recently announced it is considering the cryptoruble, which could also circumvent U.S. economic sanctions. Sweden, Japan, Singapore and Estonia are also considering digital versions of their own currency for myriad reasons, including the fact that cash use in certain countries has plummeted in recent years.
Cover image: Venezuelan President Nicolas Maduro speaks during the 16th Ministerial Council meeting of Petrocaribe in PDVSA in Caracas, Venezuela on May 27, 2016. (Carlos Becerra/Anadolu Agency/Getty Images)