Just Say No (to the Petro)

In December 2017, Venezuelan President Nicolas Maduro announced the launch of the world’s first government-issued cryptocurrency: the petro. According to the Venezuelan government, the petro will be backed by Venezuelan oil. Although Venezuela’s economic and political problems have been widely publicized, Maduro claimed the petro raised $735 million in its first pre-sales this March. Despite Venezuela’s ongoing inflation and its government’s less-than-sterling reputation for honoring its commitments, evidently some investors found the lure of a commodity-backed cryptocurrency too tempting to pass up.

What should investors make of the petro? If history is any indication, probably not too much.

One needn’t go back too far to see the dangers of trusting newfangled monetary schemes by governments with a poor monetary track record. Earlier this year, Ecuador bid adios to its own electronic money only four years after it was conceived. The digital currency was launched in 2014 with the stated goal of trying to give the 40 percent of Ecuadorians who were unbanked access to formal financial services. Under the new system, Ecuadorian citizens would be able to open up digital bank accounts with the Ecuadorian central bank (Banco Central del Ecuador). The system was inspired by the success of mobile-money systems in sub-Saharan Africa and the popularity of cryptocurrencies like Bitcoin.

But as Lawrence White prophetically warned back in 2014, the Ecuadorian government was likely influenced by ulterior motives. Following the collapse of the Ecuadorian sucre amid the nation’s severe banking and sovereign-debt crises, spontaneous dollarization followed in 1999, which stabilized the financial system and ignited a solid decade of economic growth.

While the sucre’s extinction might’ve been a boon to the citizens of Ecuador, it stripped the Ecuadorian government of a coveted source of revenue: the seigniorage governments earn from issuing their own money. With its deficits mounting and borrowing costs soaring, the far-left Ecuadorian government led by President Rafael Correa was desperate to unshackle itself from the fiscal discipline imposed by dollarization. Thus the digital-currency scheme was hatched, allegedly as a way to address the problem of financial exclusion but in reality as a veiled effort to wean Ecuadorians off dollars so they would instead rely on digital currency issued by the Ecuadorian central bank.

As White astutely noted in 2014: “[Why] does the government want to issue mobile payment credits as a monopolist? It seems likely that the project is meant as a fiscal measure. One million dollars held by the public in the form of government-issued credits is a million-dollar interest-free loan from the public to the government.”

The effort proved to be a colossal flop. The Ecuadorian government expected some 500,000 citizens would sign up for the e-money service in 2015. The actual number of accounts opened turned out to be less than 5,000. At its peak, the system only reached $11.3 million in account balances. According to White’s back-of-the-envelope calculation, since the interest rate on Ecuadorian government bonds is roughly 8 percent, the electronic-money scheme only netted the government $904,000 in debt-service savings. When you compare that to the nearly $8 million the government spent to start and maintain the project, the fiscal loss comes out to roughly $7 million. The Ecuadorian government decided to cut its losses and shut down the project earlier this year.

The simple (yet expensive) lesson sent to the Ecuadorian government by its citizens was pretty clear: “Fool me once, shame on you. Fool me twice, shame on you.” Money and trust are intimately linked. The entire reason the dollar was originally adopted in Ecuador (even with strong resistance from the Ecuadorian government) was precisely because its citizens lost trust in their government’s ability to issue money. The Ecuadorian government had defaulted on its debt and devalued its currency in 1999 in response to a sovereign-debt crisis. With deficits again starting to mount in the mid-2010s, the script seemed all too familiar. And Ecuadorians weren’t willing to be duped again.

This lesson from Ecuador’s failed experiment should give Venezuelans caution about their government’s plan to issue its own cryptocurrency. Venezuela’s fiscal situation today is even more dire than Ecuador’s, and its socialist government’s track record at keeping its promises is even more shoddy. As Diego Zuluaga documented over at Alt-M, the petro’s alleged link to oil is just that: alleged. There is nothing firmly committing the Venezuelan government to redeem the petro in any real commodity. Any link to the price of Venezuelan oil is abstract at best and entirely illusory at worst.

So, potential buyers of the petro, beware! The prospect of a commodity-backed cryptocurrency might sound enticing. But read the fine print, and consider the source. If history is any indication, the petro will only be good as snake oil.

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