DEFINITION of 'Petro (Cryptocurrency)'

Petro is a cryptocurrency proposed by Venezuelan President Nicolas Maduro in December 2017. The value of petro would be based on the country’s oil, natural gas, and mineral reserves.

BREAKING DOWN 'Petro (Cryptocurrency)'

The announcement of the proposed new digital currency comes on the heels of a rapid rise in the value of Bitcoin. The Venezuelan government’s expectation is likely that the financial community will consider petro to be an investment opportunity, with strong demand keeping the currency stable at a time when the value of country’s official currency, the Bolivar, has plummeted due to high rates of inflation. An unstable currency has made it more difficult for Venezuela to service its debts.

Venezuela has one of the world’s largest oil reserves, but after years of financial mismanagement and political turmoil the country’s economy is in free fall. The low price of oil – a commodity that accounts for half of the country’s GDP - has severely damaged the country’s ability to pay back international creditors, and the country has flirted with bankruptcy in recent months. High rates of inflation, coupled with shortages of many basic goods due to price controls, has sapped the country’s productivity and sent the economy into a prolonged recession.

International observers believe that the primary impetus behind the announcement of petro digital currency is to circumvent U.S.-led sanctions. These were levied in response to the deteriorating political situation in Venezuela, with the government failing to hold free and fair elections, undermining democratic institutions, and imprisoning leaders of the opposition. The sanctions prevent the country from being able to readily use international financial institutions, which now have to heavily scrutinize the source of funding in order to be in compliance. This may result in payments being delayed and the country going into technical default, as it did in November 2017 when payments to government bondholders were made late.

Cryptocurrencies have been criticized by some in the international community as a tool for individuals to launder illicit gains by bypassing currency controls and regulations. The United States, for example, has sanctioned several prominent politicians and business leaders in Venezuela for their expected involvement in the sale of drugs and the suppression of democracy. If petro is made official it could allow sanctioned individuals to move money out of the country by. This would be done by purchasing petros, selling petros for a more stable currency such as the dollar or euro, and then depositing those currencies outside of Venezuela.

The announcement of petro puzzled proponents of cryptocurrencies. Part of the popularity of cryptocurrencies such as Bitcoin is that they had not, up until this point, been issued by governments. Having the government directly control the digital currency not only goes against the founding principles of the cryptocurrency movement, but may also undermine the value of the currency. Before buying into petro, investors would have to know how its value is calculated and how trustworthy it would be. Because the government is not considered trustworthy or stable, investing in petro would likely be a risky proposition.

 

 

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