On the Eve of the Petros pubic sale, Francisco Memoria discusses sovereign asset backed cryptos and what it means for our industry. Should we be worried that Russia, Iran and others have started looking to cryptocurrency as the tonic for a struggling economy?
Late last year, Venezuelan president Nicolás Maduro announced the country would launch its own national cryptocurrency, the Petro (PTR). Following Venezuela’s footsteps other countries have revealed they’re reaching for their very own cryptonic – these include Russia, Iran, Turkey, and Cambodia.
The Petro is an oil-backed cryptocurrency, whose pre-sale began on February 20 and public sale will launch March 20. Per the Venezuelan leader, it raised $735 million in a day, and over $5 billion so far. Its pre-sale value is based on that of a barrel of oil, meaning each Petro token has a $60 price tag on it. The white paper promised it “Will be an instrument for Venezuela’s economic stability and financial independence”.
Per Maduro, institutional investors can get a discount while buying the Petro. As soon as it started raking in money, the country’s president, presumably giddy with excitement at the Petro’s professed success, announced he would launch a new cryptocurrency backed by precious metals, the Petro Gold.
The Petro is supposed to be oil-backed but, in reality, there is no real way to exchange a Petro for a barrel of oil, as the oil backing it hasn’t even been extracted yet. These cryptocurrencies are backed by assets, supposedly, to stop them from being too volatile.
The Petro can be bought with hard currencies, and with cryptocurrencies like Bitcoin and Ethereum, not with bolivar, which has been losing half its value each month. Investors are reportedly coming from various countries, including China, Japan, Brazil, Spain, Turkey, Qatar, and Colombia. If Maduro’s numbers are real, the Petro is by far the most successful ICO to date.
However, as the century-old think tank Brookings Institute questioned, what’s in it for foreign investors? Maduro ordered state-owned companies and Venezuelan airlines to accept the Petro as a payment method and revealed it will be used by Venezuelan citizens to pay for fees, taxes, and public services. Besides financial speculation, foreign investors seemingly won’t be able to even use the cryptocurrency.
The country’s opposition-led congress has claimed the cryptocurrency’s sale is merely a way to illegally mortgage the country’s oil reserves. Moreover, the Petro will likely not help Venezuelans survive the deep recession Venezuela is going through, as it can’t be purchased with the country’s fiat currency, the bolivar.
What’s Driving The National Cryptocurrency Surge?
Taking a quick look at the countries looking to issue national cryptocurrencies makes it clear that they all share a few characteristics. Countries like Russia, Iran and Venezuela have all been hit by international sanctions, largely imposed by the United States and the European Union. These sanctions stifle their economic activities as Venezuela, for example, can’t sell its downgraded, close-to-default government bonds for US dollars or other ‘hard currencies’.
Iran has been completely cut off from the international SWIFT system. As some claim, national cryptocurrencies may just be a way for governments to bypass sanctions. Venezuela’s Petro, if Maduro’s claims are true, has helped the country raised $5 billion in foreign capital, including bitcoin. That capital can now be used to support the Venezuelan regime.
Turkey, on the other hand, doesn’t have to deal with international sanctions. Per a 22-page report created by the country’s former Industry Minister Ahmet Kenan, Turkey needs to adopt cryptocurrencies and blockchain technology “before it’s too late.” Per his words, missing out on blockchain technology would be a big mistake – as such, he proposed a “Turkcoin.”
The Turkcoin would be backed by the country’s Wealth Fund. The Fund includes some of the country’s largest companies, including Turkish Airlines, Ziraat Bank, and the Istanbul Stock Exchange.
While the advantages of using a blockchain-based cryptocurrency instead of physical coins and notes are many, these countries may simply be trying to attract foreign investment. By pumping their national cryptocurrencies as much as possible, they’re effectively able to market their developments in Fintech, and attract foreign capital.
If the goal was to merely bypass economic sanctions, using privacy-centric cryptocurrencies like Monero and Zcash would likely be more effective, as transactions would be untraceable. Simply buying these cryptocurrencies wouldn’t provide an influx of capital – one that at least some of these countries seem to desperately need.
Backing up this point of view is the fact that gold-backed cryptocurrencies already exist. The Royal Mint Gold (RMG) provides its users a safe, simple way to transact physical gold using blockchain technology, as one RMG equals one gram of physical gold stored in the Royal Mint’s vault. If the Petro Gold is set to be backed by supposedly unredeemable gold, what’s the point of buying it, instead of just buying gold? While we can’t store an oil barrel in our homes, we can store gold or Bitcoin or Monero.
The Centralization Problem
The Petro, the Petro Gold, the Turkcoin, Russia’s CryptoRuble, and Cambodia’s Entapay show us that cryptocurrencies cannot be centralized, for various reasons. Taking a step back, attracting foreign capital merely means the governments are making money, not the people.
If these cryptocurrencies are indeed being used to bypass international sanctions, they’re effectively undermining the power these sanctions have. While in certain situations economic sanctions could force an aggressive nation to negotiate, being able to bypass them could result in further aggression.
Should these national cryptocurrencies allow nations to circumvent sanctions and acquire large amounts of capital, the coercive force that sanctions imposed will be no more, and war can easily get one step closer. War, as libertarians see it, is essentially mass slavery (conscription), coupled with theft (war taxes), and mass murder (civilian victims). It’s a scenario to avoid at all costs.
Decentralized cryptocurrencies like Bitcoin allow people to transact without having to worry about a government forcing them to pay a certain percentage, or manipulating the value of their money at will –national cryptocurrencies should not be a way for governments to avoid the responsibility of sound monetary policy.
Using the Petro as an example, there is no guarantee the Venezuelan government won’t manipulate the official Petro to bolivar rate according to its best interests. The government could even default on its obligations this way, by choosing a rate that’s inconsistent with the market value.
By investing in bitcoin, people are effectively choosing to invest in censorship-resistant money that allows them to be financially free, to own their money. Investing in a cryptocurrency like the Petro supports the corrupt government of Venezuela and allows it to take a harsher stance against international sanctions.
At the end of the day, national asset-backed cryptocurrencies like the ones we’ve seen so far harm the cryptocurrency ecosystem as a whole. Not only do they help fund governments and can potentially get us one step closer to war, they also harm cryptocurrencies themselves. They use the technological efficiencies of blockchain technology whilst embedding the worst parts of the old system.
If foreign investors put their money in a cryptocurrency like the Petro, they will one day realize that they have no use for it, which will only contribute to the idea that cryptocurrencies facilitate fraud, effectively stifling cryptocurrency adoption.
Bitcoin, the first free-market backed cryptocurrency, is the people’s money. It allows people all over the world to transact with one another, without having to be afraid of censorship. While the Petro won’t put food on the table for Venezuelans, and the Entapay will likely do nothing for Cambodians as well.
However, Bitcoin and other cryptocurrencies have given Venezuelans a way to place their wealth outside the reach of Maduro’s irresponsible monetary policy and corrupt regime, whereas, the Petro, is merely the old system masquerading as sovereign independence and a shiny new technology.