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The Trouble With State-Backed Cryptocurrencies

August 16, 2018

 

The widely criticized Petro cryptocurrency will be taking what will arguably be the greatest role that a cryptocurrency has ever taken in a country.

 

To recap, Petro is a cryptocurrency which was apparently created by a team close to the Venezuelan President and his executive team. According to its white paper, it is backed by real oil reserves and thus, it is supposed to be a stable coin that can be used reliably as an everyday currency.

 

Like Tether and other controversial stable coins, however, Petro is not without its own problems. In particular, it has been criticized for not being available to Venezuelan citizens at all up to now. In addition to this, its case is not helped by the USA’s effective ban on any US citizens buying Petro, via an executive order from President Trump.

 

Despite this, on August 14, a Venezuelan news outlet reported that Petro will effectively become the country’s stable coin, with the aim of tying itself to the native Bolívar that has been sinking in value due to inflation.

 

The trouble with this begins with the fact that there is no indication that the Venezuelan government will do this in connection with finally making Petro available to the general populace.

 

Furthermore, the intended future usage of Petro has been said to be, “as a unit of account,” which is one of the primary functions of a national currency. In essence, when money is used as “a unit of account,” it is tied to real items which can be bought. For a prime example of this, think about how we understand how much groceries are worth. The prices of each item in a grocery store are quoted in dollars. Thus, the dollar is a unit of account, or a unit for determining how transactions can be settled.

 

It logically be concluded that Nicolas Maduro and his administration are trying to create this new unit of account with Petro, to eventually replace the Bolívar, which is now known as one of the least valuable and most inflationary currencies in the entire world. The fact that the government plans to peg salaries to Petro as well, would seem to support this conclusion.

 

On the other hand, the report by Cointelegraph on the subject mentioned that in connection with this, the government will be introducing a “new” Bolívar to replace the old one.

 

All in all, in the end, Venezuela will end up, therefore, with two currencies. With the US ban in mind, it also remains to be seen whether other countries will follow suit.

 

If they do, it could reasonably said that the country’s chances of pulling out of its economic recession will be even more in question.

 

 

By: BGN Editorial Staff

 

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