The Petro cryptocurrency project is a national oil-backed digital currency that was launched by president Nicholas Maduro back in December 2017. A global crowdfunding campaign was announced by the government as part of bolstering up up the project. According to the Venezuelan government more than $5 billion were raised through this initiative but experts have disputed those claims.
The Petro project was the first attempt by any nation to issue cryptocurrency on their own. Bitcoin, Ethereum, Bitcoin Cash and other cryptocurrencies are mostly borderless P2P transaction networks not limited by geography and governments. However, this project was supposedly decentralized as well but with the government of Venezuela having the final say in its management.
However, despite the passage of more than 2 years, limited if any functionality of the cryptocurrency project has been seen. This was expected as the whole concept of Central Bank Digital Currencies (CBDCs) is new let alone the kind of coin Petro was which can be loosely identified as an asset backed state cryptocurrency since the Maduro government claimed that each Petro coin will have the backing of one barrel of crude oil.
At first, the idea was ridiculed by the cryptocurrency circles as well as other experts in the world. No country agreed to be onboard with the Petro initiative except of Russia. Russian president Vladimir Putin announced his support for the project back in 2018 and Russian experts have worked alongside their Venezuelan partners on the subject. While the intent of Russia to get involved has not translated into actual payments and receipts in Petro, it has allowed Russian experts to learn more about the project for launching a digital Ruble in the future. But, Venezuela is content with the help and understanding they are getting from Russia. Russia is also helping Venezuela overcome sanctions-related issues.
Why the need for Petro?
But why was there a need to launch such an ambitious cryptocurrency project, the likes of which haven’t been done by any other country of the world? Well, for once Venezuela has been under severe economic stress for the last five years and so. Due to a combination of crippling American sanctions and governmental mismanagement, the Venezuelan public are facing extremely high levels of inflation. Inflation more than 100% is called hyperinflation and the Venezuelans are experiencing more than 1000% for the last few years.
Due to the fiscal mismanagement of the central bank and continuous printing of new notes with no repercussions, the national currency of Venezuela Bolivar has lost more than 99% of its value in the last few years alone. A big mac would have cost 27 Bolivars four years ago. Now it costs more than 100,000 bolivars according to latest estimates. As a result, the Venezuelan government has to keep issuing bigger and bigger currency notes, the highest one being 100,000 bolivars that it recently launched which is shockingly worth only $2.5 in real value. While the president Maduro has tried to overcome the crisis as much as possible in the socialist country, he continues to face grave problems. A gruelling political crisis due to the economic situation has also crippled the nation further with some in the section calling for popular uprisings against the Maduro led governments but they have been managed by the government in one way or another.
The issue of sanctions was also an extremely thorny issue for Venezuela. The US government imposed sanctions on the government of the now deceased leader Hugo Chavez around 2006. Nicholas Maduro was Hugo Chavez’s handpicked successor and former aide and more or less followed the same principles as the iconic leader. After Chavez’s illness and resulting death, Venezuela got embroiled in the crisis due to low oil prices around the world. Since Venezuela’s economy was dependant on oil exports, the economy suffered serious setbacks which resulted in the current financial crisis.
The US continues to have crippling sanctions placed on Maduro and has now practically banned any other major country to buy oil from the country. India and China, previously the biggest importers of Venezuelan oil have now reduced their imports considerably thus creating further issues for the government. The Petro cryptocurrency in addition to being a way to provide a reasonable alternative to the stricken currency bolivar was also designed as a global P2P cryptocurrency that could one day circumnavigate the US sanctions on the SWIFT bank transfers.
This enormous financial problem and the rise of cryptocurrency in 2020 made the Maduro team consider blockchain and cryptocurrencies as a viable option. They sat down with their best developers regarding a cryptocurrency wallet feature for an eventual Petro cryptocurrency and hired some experts to actually develop a ledger-based cryptocurrency based on blockchain technology.
The development on the Petro cryptocurrency started back in early 2018 and continues to this day as it is a learning curve that every such project has to go through. But, the development of Petro has been marred by several problems. At first, the whitepaper of the cryptocurrency envisaged an Ethereum-based token but at the time of the launch, it was changed to an NEM-based coin and afterwards, the whitepaper was once again changed to copy the workings of Dash cryptocurrency itself, thus practically making it a soft fork of Dash.
However, despite many lingering issues in development, the currency can now be owned and transferred through its wallets. Transparency is low but most of the future CBDCs and other state-owned coin projects are unlikely to have any more than than because the state is always likely to treat it as a kind of national bank currency.
In early 2018, the government in an effort to uplift the project enforced a rule that all VISA fees should only be payable through the Petro cryptocurrency. This created some problems for the public as Petro wallet was unstable and unfinished back then and couldn’t be used for transactions. At Christmas 2019, the president Maduro announced to give 0.5 Petros ($30) to ex servicemen of the country but to do that, everyone had to download the PetroApp and apply through it. Rather than being a real Christmas present, it turned out yet another way to get the public interested in the Petro only.
However, the wallet has been fixed somewhat and users can at least take part in transactions for these basic government services mandated by the state. There are some lingering issues in its working as well as the government hasn’t clarified where the backed deposits of oil are present for such a big cryptocurrency project. Technically speaking in order for the cryptocurrency to work, the government has to have a big crude oil reserve somewhere in the country or even abroad. This is the reserve from which the coin derive its value from as the same happens with stablecoins like USDT, USD Coin and Gemini Coin. However, not only this point been completely ignored by the Maduro government, it is also more and more obvious that the Petro cryptocurrency is not actually going to be backed by the oil but just a way to create an alternative currency that will get rid of the heavy inflationary currency currently under regulation in the country.
The world community didn’t respond very well to the cryptocurrency project because of lack of transparency and future plans. The plans kept on changing and the concept itself was upgraded at will over time. Most of the cryptocurrency investors and experts were unanimous in their approach that Petro was not to be trusted as it was a government-backed token and the government can instantly change its liquidity, pricing and workings at will. It was basically the antithesis of everything the de-regulated cryptocurrencies were offering i.e free of central government involvement, consensus-based operation and currency manipulation. None of these things have to date been ruled out by the Maduro government and thus the uncertainty remains.
Despite the ineffective cryptocurrency, the US government banned it in 2018 for all transactions around the world and warned to sanction the country that chose to use this. While no country was interested in the development in the first place, the 1-2 countries who were interested including Iran and Russia also took a step back in their approval and only continued their involvement under the wraps. After the US president placed sanctions against Iran again in 2018, the Iranian government came out in full support of the Petro and even at one time promised to use the cryptocurrency for limited trade but that never happened. Both of these nations are heavily reliant on oil exports and they don’t have a lot of bilateral trade in the first place.
The ordinary Venezuelans also gave a lukewarm response to the digital currency. Due to the ever-depreciating value of Bolivar currency, the public didn’t trust the government to do the right thing when it comes to the development of the cryptocurrency and its fair distribution. Even if they decided to use the cryptocurrency because of national sentiment and other patriotic initiatives, there was little way to actually use it as the wallets were at times faulty and the currency transactions gave issues.
The government also kept re-imagining the project without any seriousness to hold any consensus or actual discussions regarding its workings. All of this hampered any genuine appreciation and reception of the project by independant stakeholders of the industry.
By contrasts, in rudimentary terms, Facebook’s Libra cryptocurrency is similar to Petro in many ways. It is centralized, it is backed by assets and can be used for international borderless payments. But, instead of people speaking against it, we have companies like VISA, Mastercard, Paypal and others fully endorsing the projects and hopping onboard despite the US government openly challenging and banning the idea of a currency like this that would threaten the dollar itself. So, while Libra faces considerable challenges of its own, it is basically Petro but done right i.e through a proper resourceful channel with a reputation, all of the global stakeholders onboard and no short-sighted made up plans on cryptocurrencies on the whitepaper that can be changed at will. While Petro has plenty of opportunity to strike back, it is not in a convincing curve right now to have any real chances of doing so.
It is hard to say what the future will be like for Petro or other CBDCs being heavily discussed in countries around the world. Some countries like Japan have categorically refused the idea of a CBDC for various reasons while others like Russia and Ukraine have shown interest in the development of such a currency. The idea is there and states are increasingly experimenting with it but, the fact remains that this is unchartered territory for many and change will take time and investment on infrastructure rather than a half cooked government-issued whitepaper that Petro has. Some countries have the expertise, the patience and the approach to correctly pioneer a state cryptocurrency for the first time but increasinly it seems that Venezuela is not that kind of country according to the present scenario.
While some crypto experts have problems with CBDCs and their future, objectively there shouldn’t be as CBDCs can be a way to ensure the government is not over-issuing currency and creating inflation as a result of it. It is the future of centralized currencies and more and more countries are interested in this approach. But, Petro is neither a CBDC exactly as it is not currently represented in Sovereign Bolivar terms. It is essentially a cryptocurrency tied to the price of a barrel of crude oil and not just any crude oil, Venezuelan crude oil which sells for a lot less money because of the threat of sanctions that come with it. There is also no way to know or find out if there is an actual reserve of crude oil present to back the Petro itself too.
So, while CBDCs will become an important part of the future, Petro will mostly likely be relegated to the Bolivar’s rarely used digital side if the project is not picked up and worked intelligently and enthusiastically be real experts and not GitHub copy pasters for once.