Venezuela and Russia both have economies that are heavily dependent on the price of oil. Both countries are dealing with economic sanctions imposed by the United States. And in the past few days, both countries began moving forward with an official state cryptocurrency. Neither of offering sounds like it should be taken seriously.
We've mentioned the rumours that Russia and Venezuela were working on their own cryptocurrencies in the past, but recent news indicates that both countries will be cashing in on the cryptomania very soon. On Tuesday, the Financial Times reported that officials in Moscow say that President Vladimir Putin has commissioned his economic team to make a blockchain-based version of the Rouble. And last week, Venezuela's information minister, Jorge Rodriguez, announced on state TV that his country's new cryptocurrency, the petro, will be issued in "a matter of days."
For casual cryptocurrency watchers, this might sound like a positive development in the field. After all, naysayers often point out that the value of fiat currency might be as imaginary as bitcoin but it has the backing of the full faith and credit of a government. So, shouldn't the idea of a government-backed cryptocurrency indicate that we're moving toward options that have more stability? Not necessarily.
Above all, Venezuela's idea for the petro sounds like some grade-A bullshit. That doesn't mean that Russia's planned cryptocurrency is any better, it's just earlier in the planning stages — though, it's unclear how much planning Venezuela has really done. President Nicolas Maduro first announced his cryptocurrency strategy at the beginning of December as an alternative to the rapidly depreciating Venezuelan bolivar. According to Reuters, prices in Venezuela have risen 1,369 per cent between January and November, and the best option the government has been able to offer is a 40 per cent hike in the minimum wage. But based on reporting by Bloomberg, it seems that all Maduro is attempting to do with the petro is the state equivalent of an iced tea company slapping blockchain on its name and watching its stock rise. From the report:
The petro will be different from bitcoin and other cryptocurrencies because it will be backed by hard assets, Rodriguez said. Maduro on Wednesday certified that some 5 billion barrels of Venezuelan oil reserves will be used as financial backing for the petro, according to the nation's oil ministry.
That oil can support financial instruments worth $US267 ($341) billion, the ministry said in the statement. By comparison, bitcoin, the largest cryptocurrency, has a market capitalisation of about $US246 ($314) billion, according to coinmarketcap.com.
So, the oil reserves back up Venezuela's fiat currency, and that currency is in a tailspin. But now that some sort of blockchain version of that currency is being introduced, people should feel good about it because it's backed by the oil reserves? OK.
What's more, it sounds like Venezuela is looking to drop a set amount of its currency, rather than replicating the system of bitcoin or ether that involves individuals "mining" the currency by crunching complex mathematical problems. Since the petro is intended to be a centralised currency, this isn't a big surprise, but for many enthusiasts, this would disqualify the petro from even being considered a legitimate cryptocurrency at all. Ripple is the most successful current example of a pre-mined ledger-based payment system. It's caught on with banks like UBS and Unicredit who are testing it out as a way of dipping their toes into the blockchain pool. But for those who have an ideological mission in spreading decentralized currencies like bitcoin, pre-mined currencies are the antithesis of what makes blockchain good, and they are often a solid indication that you're getting involved in a scam.
The petro definitely sounds like a scam. Not only is it backed by that oil that also backs its fiat currency, it's not even clear if Venezuela will be the owner of that oil for long. In August, Reuters reported that Venezuela was secretly offering Russia control of a significant chunk of its state-owned oil assets in exchange for further lines of cash and credit. We don't know if any deal has been struck behind closed doors, but in November, Russia did generously restructure the billions in debt that it's owed by the Venezuelan government, and it's only requiring "minimal" payments for the next six years.
The hastily thrown together petro also raises questions about what kind of protocol will be used to implement Venezuela's blockchain. The most effective method of building a secure cryptocurrency has been through open source code that gets refined over years. Unless Venezuela is just taking a tried-and-true system like bitcoin, keeping it open source, and calling it its own, there's no reason to trust the security of the petro.
All-in-all, the only benefit that the petro seems to offer is that people might be able to stop carrying around huge sacks of cash to buy basic goods. It's unclear exactly how a centralised digital currency would help the government get around economic sanctions, as Maduro insisted it would last month. After all, a government that's observing the sanctions can't openly accept the currency, whether it is coming in the form of a paper bill or a string of ones and zeros. Shady actors could potentially take bitcoin or more anonymous altcoins like monero, and early adopters of bitcoin have argued that exact point for years. When a military coup kicked off in Zimbabwe back in November, for example, bitcoin surged on its local exchanges.
As for Russia's still-in-the-works cryptocurrency, authorities have also said that it could be a way around sanctions. According to the Financial Times:
Sergei Glazev, an economic adviser to Mr Putin, told a recent government meeting that a cryptorouble would be a useful tool to get around international sanctions.
"This instrument suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions," Mr Glazev said.
He added that the cryptocurrency would be "the same rouble, but its circulation would be restricted in a certain way," allowing the Kremlin to track its every move.
Again, it's unclear how a centralised digital currency would be better for illegal activity than systems that already exist. One clue might come from Putin's reported orders to his staff to come up with a way to regulate cryptocurrencies. Russian law is regularly used as a way to keep the enemies of the powerful in line. When everyone is guilty of breaking the law, the government has the leverage to selectively enforce it as it pleases. For instance, laws designed to prevent the offshoring of Russian money are rarely used, unless a particular company or oligarch prove to be uncooperative with the state. It's possible that Putin is just attempting to move control of illicit activity through cryptocurrency more firmly under his own control.
We've become used to bankers calling bitcoin a fraud and regulators in countries with stable financial systems warning that tougher restrictions will be necessary for the future. Soon, we'll see what happens when countries with really screwed-up financial systems start insisting that their coin is the best coin.