The petro was a chaotic, disorganized attempt by the Venezuelan government to save the country from its ongoing economic turmoil. It did not succeed – on the contrary, the failure was spectacular. So what were the reasons behind the downfall of the first government-backed cryptocurrency? We’ll tell you the most important details.
The economic downfall of Venezuela: plummeting oil prices and the recession that followed
The whole story starts with one major question: how did Venezuela end up in a recession so bad that it made the government so desperate for a radical solution they ended up introducing a completely new state-backed cryptocurrency – an idea so new, it’s basically unheard of?
Well, it all started back in 2014 when the global price of oil started to drop – or rather a more precise way of phrasing would be this: the price of oil plummeted, decreasing by almost 60%. And as Venezuela’s economy is almost completely built on oil, we can all guess what happened after that: the economy and the whole country went into recession.
The bolivar, the national currency of Venezuela, also followed the lead and fell victim to hyperinflation. In 2015, inflation was around 100% – in 2017 the annual inflation was estimated to be around 2,000%, rising to around 130,000% in 2018. And it’s still far from being over.
To make matters even worse, the economic downfall was not the only problem Venezuela had to face during those years (and still has to struggle with today). The power was in Nicolás Maduro’s hand when the recession hit – and using the “national emergency” he consolidated all three branches of the government to, for a lack of a better word, basically take over the country in a dictatorship. This, among other reasons led to another problem in the country: namely, US economic sanctions that made it even harder for the Venezuelan economy to stand up from its fallen place.
So in a country where the economy is in shambles and the power is in the hands of one person, something definitely needs to be done. But almost no one had their money on the final solution they ended up choosing.
El petro – a scam to get money or the way out of recession?
Maduro had power – but he needed one more thing that is sometimes harder to get: money. And the plan he came up with was definitely something that could have been genius – if executed well. Unfortunately for him and Venezuela, the chaos and disorganization of the country seeped into his crypto plans as well.
In December 2017, they finally introduced the petro, or el petro as known by the locals. According to the initial announcement, the cryptocurrency would have been backed by the country’s oil and mineral reserves like gold and diamonds, and its main goal would be not only to supplement the plummeting bolivar but the create a new way for international financing.
Introducing a new government-backed cryptocurrency whose value is backed by oil is not actually such an impossible idea. Cryptos can be linked to physical commodities – there are examples of cryptocurrencies that are backed by, for instance, gold or diamonds. But these commodities have to be easily traded on exchanges – and the oil for petro was certainly not that, as we’ll see in just a little.
A new crypto-currency could have made sense. It’s a great way of circumventing unfair international sanctions and also a very effective way to fight the immense inflation that has been such a big problem in the country.
But almost from the second the petro was announced, the problems started to trickle in. And they kept coming.
The problems of petro
One thing was on the technological side of the cryptocurrency. Originally it was announced that the petro would be on the Ethereum network – only to go back on that just a little later, claiming it was never their intention and the petro is actually going to be on the NEM network, a decentralized blockchain network run by a non-profit organization in Singapore.
But the technological problems did not stop there – the petro was also accused by several crypto experts that it was almost a complete rip off of Dash. The creators of petro never really addressed the plagiarism accusations or gave any sort of explanation for that.
But technology was one part of the story – the biggest issue was simply this: the petro was never really planned out. It was launched, some initial coins were sold but when a couple months later, the news organization, Reuters started an investigation into the petro issue, they came up with a shocking result: there was basically no trace of petro being used anywhere.
The oil-backed crypto: but where’s the oil?
The oil that was supposed to back the whole crypto project? Well, it was there somewhere – still buried in the ground with no plans or funding to actually extract it from there. Remember when we said that a crypto whose value is linked to a physical commodity has to be readily traded? Being buried in the ground surely does not sound like the ideal situation for that.
So there’s no progress on the oil side of the story – that’s one thing. But when Reuters reporters decided to go directly to the source, to the Finance Ministry, they were presented with another issue: the office for the Superintendent of the petro was nowhere to be found. The website for the project? Also non-existent.
The petro is also not listed on any of the major exchanges and is not accepted in the majority of stores and shops in Venezuela.
So not only the petro is not selling and has almost no trace of existing, it’s also deeply linked to a dictatorship that is widely criticized by most democratic governments.
The result: a loss for Venezuelans and the crypto community
According to the Brooking’s Institution, an American research group, “it is relatively unsurprising that a dictatorship with little reserve currency … has resorted to a deceitful means like introducing the petro … it exists to create foreign currency reserves from thin air.” Maduro needed money and tried to use cryptocurrencies as a way to get it – it failed and it certainly did not do any justice for the reputation of cryptocurrencies.
It’s hardly the sort of advertisement cryptocurrencies needed. And it’s a shame – most importantly, to the Venezuelans who were pushed into a scam, but also the crypto community as a whole.
And the really frustrating thing is this: the petro could have worked. Venezuelans were interested in cyptocurrencies even before the petro to fight the recession, the inflation and the sanctions. But the petro was never the cryptocurrency they envisioned. It was a tool for Maduro to further and finance his anti-democratic agenda – it was never about giving the Venezuelan people a way to get out of the economic turmoil they never should have been in in the first place.
Cryptocurrencies can provide a solution to many economic problems. But state-backed cryptos are different. One of the most basic principles of cryptocurrencies is that it’s supranational. It knows no borders and is available to people regardless of nationality or citizenship. But as soon as a government gets involved, it will always become political.
And this is exactly what happened with the petro and Venezuela. It became a political question instead of staying what it should have been in the first place: a chance for a suffering country’s people to get up.