[David Floyd is a staff writer at Investopedia. The views expressed by columnists are those of the author and do not necessarily reflect the views of Investopedia as a whole.]

On Feb. 20, Venezuelan vice president Tareck El Aissami – who is accused of drug trafficking and aiding members of Hezbollah – announced the beginning of the pre-sale for petro, saying the cryptocurrency's launch places Venezuela "at the vanguard of the future." That's doubtful, and not just because there's no evidence, according to Ars Technica, that the $735 million supposedly invested during the first day of the pre-sale ever changed hands.

The country's president, Nicolás Maduro, revealed that the government would create a "cryptocurrency backed by reserves of Venezuelan wealth – of gold, oil, gas and diamonds" on Dec. 3. While that announcement preceded the erstwhile Long Island Ice Tea's pivot to cryptocurrency mining – they're called Long Blockchain Corp. (LBCC) now – and Eastman Kodak Co.'s (KODK) initial coin offering, the three should be seen in the same light: drowning entities splashing towards an island of dumb money. Kodak hasn't turned a profit since 2013, the year it emerged from bankruptcy. Long Blockchain has been losing money for even longer. Both firms saw their stocks surge by triple digit percentages following these announcements.

Venezuela's situation is not all that different. Its leadership has destroyed the economy, even though the country enjoys larger oil reserves than Saudi Arabia. Hospitals have run out of medicine, children are starving, the currency has been inflated into oblivion, and the president – who seems to have survived his predecessor's purges through nonthreatening incompetence – spends his time DJ-ing the misleadingly named Salsa Hour radio show (it is much longer than an hour).

Like Kodak and Long Island, Venezuela's government is hoping for a crypto-bubble bailout, and there's some chance they'll get it, despite the U.S. Treasury Department's warnings that investing in petro could violate sanctions and the neutered Venezuelan congress' declaration that the petro is illegal.

What won't happen is another of Maduro's promises, to "advance a new form of international finance." The petro is not innovative. It is not backed by anything. If it is a cryptocurrency – early indications suggested it wasn't, while subsequent descriptions are just confusing – it's a worthless one. (See also, Venezuela Urges 10 Latin American Nations to Adopt Its Cryptocurrency Petro.)

Note on Updates

This article was originally published on Jan. 16, based on information available from the Venezuelan government at the time. It has been updated to reflect the publication of the petro white paper on Jan. 31 and the petro pre-sale on Feb. 20. Because both of these events included significant, unexplained departures from previous statements, the original article has been left largely unchanged, with new information added in separate sections.

The Petro Isn't Anything-Backed

In a fawning interview that appears on Venezuelan state media, computer science engineer and blockchain entrepreneur David Jaramillo told Celag, a sympathetic think tank, that the petro's value

"won't be defined by market speculation, which often provokes large up-and-down fluctuations. The petro's price will be related to the international price of gold, gas, oil and diamonds. This is what the digital currency investment community has been craving for a long time."

The idea that commodity prices – themselves subject to pretty sharp fluctuations – will dictate the price of the petro is absurd. Even accepting Maduro's claim that the token is backed by natural resources, that stabilizing influence would hardly matter given the rapidfire booms and busts of the cryptocurrency market. Meanwhile, the claim that cryptocurrency investors are clamoring for commodity-backed coins is strange: it's been tried, sure, but only because everything has.

More importantly, though, claims that the petro is backed by oil or anything else are hollow. The Venezuelan government has been mostly silent on what this backing entails. Decree 3.196, article 4 says it will consist of a purchase agreement for one barrel of oil per token ;"or whatever commodities the nation decides"; that arrangement almost certainly doesn't allow investors to demand physical delivery. So what can they get?

Article 5 offers this guarantee:

"The holder of petro will be able to realize a market-value exchange of the crypto-asset for the equivalent in another cryptocurrency or in bolívares [Venezuela's fiat currency] at the market exchange rate published by the national crypto-asset exchange."

But the picture is muddied by back-to-back, seemingly contradictory references in article 4 to the dollar-denominated OPEC basket and the now-yuan-denominated Venezuelan crude basket, the prices of which diverged even when both were quoted in dollars. What kind of bolívar rate can investors expect the national exchange to offer? If the official bolívar-to-dollar exchange rate of 10 to 1 is any indication, not a good one: the market rate is closer to 100,000 bolívares to the dollar. (The official rate has since been devalued, but does not remotely match the market rate.)

Gaceta Oficial Extraordinaria N 6.346 Superintendencia de criptovidisas y detalles del petro by Banca y Negocios on Scribd

In short, petros are "backed by oil," meaning you can exchange them for Venezuelan paper money, which is so worthless that thieves will not take it, on official Venezuelan government exchanges, at the Venezuelan government's probably-absurd official exchange rate.

Update: It's Definitely Not Backed By Anything

On Jan. 31, the Venezuelan government released a white paper that made it clear that petro has nothing to do with oil. There was no mention of the government exchanging petros for anything. Rather authorities will accept it as tax payment, which is hardly earth-shattering for a government-issued currency. Even if this "state backing" does confer some actual value on petro, it is only relevant to Venezuelan taxpayers.

The white paper offers a formula for determining the petro's official bolívar exchange rate, which is as follows:

There's a reference to the price of oil and a reference to the rate offered by official exchanges, which is apparently different from the rate at which tax authorities will accept it. Then there's the "discount rate" Dv, which is set to fall from 30% during the pre-sale to 0%.

In reality, however, the government will almost certainly accept petro at the rate it feels like accepting petro. The government's promises to honor its debts already lack credibility, since it's in default on outstanding bonds. 

Petro Isn't a Cryptocurrency Either

So the petro isn't really oil-backed, but is it even a cryptocurrency? Back to Jaramillo:

"The marvelous thing about the world of cryptocurrency is that transfer costs and commissions tend to be zero. It's a way of democratizing financial flows, without regard to the country or social stratum of the investor. This is possible through blockchain technology, which digital assets utilize, in which the decentralization of information permits a market without intermediation or manipulation by third parties."

Ignore the fact that bitcoin transaction fees averaged over $30 when Jaramillo made that claim about zero costs. The reference to "decentralization" is far more misleading. To redeem an "oil-backed" petro, you must sell it on a government exchange for a government rate, an interesting approach to "a market without intermediation." (The decree makes it clear that investors can use independent exchanges, where market rates would prevail.)

Then there are the government's references to mining. While details about the technical specifications of the petro are basically nonexistent, it's hard to imagine why the currency would need to be mined. In bitcoin, ethereum, and other decentralized cryptocurrencies, mining is the artificially difficult computation that nodes on the network must perform in order to add a new block to the chain. The computations per se accomplish nothing: The point is to make attacking the network too expensive to be worthwhile. Mining prevents any one party from be able to control the network. (See also, What Is Bitcoin Mining?)

So if the government controls all the nodes, mining serves no purpose. The petro's miners are being registered by the government. A recent promise by Maduro to "set up cryptocurrency mining farms in every state and municipality in the country" heavily implies that the network is centralized. A centralized network can just use a database, which is much less resource-intensive. Venezuela's mining farms aren't likely to do much more than waste electricity.

Everything about the petro, from its official exchange rates to its official mining operations, boils down to a government dictate: Let it be done, or in Latin, "fiat." Petro is not a cryptocurrency.

Update: Never Mind, It's an Ethereum-Based Token Now

Except that now, petro apparently is a cryptocurrency. The white paper scraps all references to mining and says that petro will be an ethereum-based ERC20 token. In other words, petro may be legitimately decentralized, in that the government is unable to control and manipulate transactions as it could with centralized mining – but what does that matter?

Now it's just another ICO. There have been thousands of those, most of them all but worthless. Petro has devolved into a glorified GoFundMe. Tellingly, Venezuela won't accept its other government-issued currency, the now-all-but-worthless bolívar, in exchange for petro. Real money only. If a U.S. company were raising funds based on such hollow claims, the SEC would already have shut it down.

Another Update: Forget Ethereum, It's NEM-Based Now

According to a "buyer's manual" released in conjunction with the petro pre-sale on Feb. 20, the coin will be based on the NEM blockchain, not ethereum. No explanation is given for this change. The white paper, meanwhile, has been updated to omit all mention of petro as an ERC20 token.

The updated white paper explains that petro will in fact be housed on its own blockchain, with NEM-based tokens acting to reserve eventual petro-based tokens. No word on the form that blockchain will take.

That petro will form its own network is, though, more in line with early descriptions offered by Maduro. It also explains why the government would need miners – except, as noted above, it doesn't really: when one entity controls most or all of the nodes, mining serves no purpose.

It's a Governance Thing

The first block that bitcoin's creator ever mined (on Jan. 3, 2009) contained a message, a headline from that morning's London Times about a planned bank bailout. The text has been interpreted as more than a timestamp: This was the nadir of the financial crisis, and Satoshi was likely taking a jab at perfidious financial institutions, poor governance and ubiquitous cronyism. Bitcoin, a system without intermediaries, was supposed to be immune from these problems – or at least slightly better at dealing with them.

Poor governance has in fact come to haunt bitcoin, but the idea that Maduro – a dictator who has jailed political opponents, rewritten the constitution and neutered the legislature – would try to coopt bitcoin is deeply ironic. The point was to take corrupt institutions out of the picture, not to bail them out.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was updated, the author has no position in any cryptocurrency.

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