Petro doomed to fail?

 Petro doomed to fail?
Nicholas Maduro, President of Venezuela announced that the nation’s cryptocurrency, Petro, was officially on sale. The announcement comes just days after the US government..

Nicholas Maduro, President of Venezuela announced that the nation’s cryptocurrency, Petro, was officially on sale. The announcement comes just days after the US government banned the purchase of Petro.

Background

Despite having world's largest proven oil deposits, many Venezuelans have lived in abject poverty. The former President, Hugo Chavez, was in office from 1999 to 2013. In that period, billions of dollars were spent in generous social programs. After his death, his successor, Nicolas Maduro took office. In the past months, there has been a rise in inflation and a shortage of basic goods. A drop in oil prices has added to the administration’s problems.

The nation’s economy has become increasingly unstable and there is hyperinflation in the region. In August 2017, CNN reported that 3,164 Bolivars was equivalent to $1. This is a problem because private banks let Venezuelans withdraw 30,000 bolivars ($2.88) from an ATM at a time. Reports have also revealed that hospitals in the country are running out of medicines and they are unable to treat those admitted. A recent study revealed that at least 93% of Venezuelans cannot afford to buy enough food. The study also stated that 73% of the population have lost weight in 2017 alone. Reports note that people have taken to scavenging through trash.

Amidst all the political turmoil, Venezuela's cushion of cash has fallen to its lowest point in over 20 years. As of late 2017, Venezuela only had $10 billion in reserves. A nation’s reserve funds are the amount of funds it has to address any crisis and to ensure economic stability. Additionally, the nation has incurred $120 billion in debt. The United States has also imposed heavy sanctions on Venezuela, which has further affected its economy.

Analysis

In December 2017, Venezuela announced that the nation would be an releasing oil-backed state cryptocurrency called the ‘Petro’. This has been done to help its struggling economy. President Nicolas Maduro also noted that this cryptocurrency would combat the US-led financial “blockade,”. At the time he said, “Venezuela will create a cryptocurrency ... the ‘petro,’ to advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade.”

On February 20th, 2018, Maduro in a national broadcast revealed that Crypto had raised $735 million. "Today, a cryptocurrency is being born that can take on Superman," Maduro was quoted as saying by Reuters. He is also reported to have said during a national broadcast, “We have taken a giant step into the 21st Century. We are on the world’s technological vanguard.”

On March 19th, 2018, US President Donald Trump dealt a blow to Maduro’s plans by effectively disallowing American investors from participating in the initial coin offering (ICO) of the Petro. The  cryptocurrency supposedly would be backed by the country’s oil reserves. Despite the obstacles, it officially went on sale, Maduro confirmed.

He said, “It has been highly positive for these 30 days of the presale period to tell us that the Petro came out strong, so our country can grow monetarily and financially. The Petro arrived to revolutionize the global cryptoeconomy.” He also added, “Venezuela repudiates and rejects the proposed sanctions and financial persecution, and announces that the Petro will continue on its path.”

According to authorities, purchases for the cryptocurrency came from 133 countries around the world. This includes Venezuela, Colombia, Spain, the United States, Mexico, Germany, Russia, Brazil and China. It has also been revealed that 52.7% of purchases were made in U.S. dollars.

However, experts have stated that investment in the cryptocurrency is doomed to fail especially in wake of the US ban. Caracas Capital managing director Russ Dallen has said, “It’s a pretty big blow. Since most cryptocurrencies are not actually backed by anything real, cryptocurrency speculation is based on the greater fool theory -- I can buy this at $100 because there is someone who is a bigger idiot who is going to buy it at $200. When you take the U.S. out of that equation, you reduce the interest and potential for that speculation.”

Assessment

Our assessment is that if the Crypto becomes a reality, then Venezuela will become the first country to issue its own cryptocurrency. This will come during a period when countries around the world are either trying to ban or regulate cryptocurrency exchanges. However, the markets remain skeptical over whether it would become a success. Since November 2017, Venezuela has been in "selective fault" on its foreign debt, foregoing repayment to its bondholders.

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