On February 20th 2018, Venezuela opened up the Petro sale to pre-ICO investors, offering a proposed state-backed cryptocurrency based upon the market price of a Venezuelan barrel of oil. Mention of the Petro elicits impassioned, frequently hyperbolic, responses from a host of actors, virtually all arguing for the unique, unprecedented nature of this Venezuelan project. The Petro’s own whitepaper fans the flames of the heated atmosphere, for in describing the project as an “international currency developed and promoted by an emerging nation for the development of a decentralized, more egalitarian, inclusive and transparent global economy,” the authors self-consciously deploy images of post-colonial and anti-neoliberal critiques that resonate as strongly with supporters as they do critics.
That the Petro has occasioned such debate is also unsurprising, given the invariably contentious nature of discussions relating to the situation in Venezuela and questions of what can or should be done, or of how to help or support ordinary Venezuelans.
But beneath the Venezuelan case's particularities, and beyond the numerous emotional and ideological claims that often appear to be virtually inseparable from discussions of the Petro, the Petro is perhaps most remarkable not for its absolute novelty but for the way it crystallizes a number of core issues and trends generating debate within the world of cryptocurrencies. While we are cognizant of and even sympathetic to some of the claims for the Venezuelan situation's uniqueness and what the Petro is intended to accomplish, we also feel strongly that the broader issues underpinning the Petro’s emergence have too frequently been overlooked. In our view, the Petro's fullest significance is best appreciated in the context of these larger issues.
While we will not attempt to forecast the Petro’s fate in either the short or long term, we are interested in considering some of the broader issues underpinning the Petro’s emergence, for we are certain these core issues will remain prominent over the months and years ahead. These issues include:
- The general question of state-backed cryptocurrencies
- The issue of transparency, particularly in the context of state finances
- Ongoing efforts to create an asset-backed stablecoin
- States emulating startups and bypassing traditional securities markets
- Blockchain-based token offerings allowing the existing financial system and its own central node, the SWIFT network for financial communications, to be bypassed.
These issues represent the core elements actually at play relative to the Petro, and whatever the Petro’s fate may be, they will remain central whether the next instance of a state-backed token emerges from Tallinn, Moscow, Stockholm, Dubai, or Berkeley.
We will have much more to say about each of these individual themes, but our initial objective is simply to frame the larger issues and establish the general contours of the field.
The Petro is neither the 1st nor the last attempt at a state-backed cryptocurrency
While this point is widely known to those who follow the space particularly closely, others seem to consider the Petro as a controversial first instance of a state-backed cryptocurrency. In fact, the range of countries that have made meaningful reference to the idea of an official cryptocurrency in the last year is substantial. The range of countries or cities that have acknowledged exploring the idea of an official cryptocurrency or token sale stretches from Japan to Sweden and Estonia, Lebanon, Dubai and even Berkeley, illustrating the extent to which such discussions are occurring. That none of these proposals have yet materialized into a concrete, final form is not surprising given the range of questions requiring consideration, but the variety of efforts underway to better understand the possibilities and limitations of state-backed cryptocurrencies forms a clear trend.
Within this context, it is unsurprising that a country in as desperate a situation as Venezuela is the first to move on an actual proposal, for it might be said that there is relatively little to lose.
But this should not distract from the broader pattern of cryptocurrencies almost inexorably making their way into the public sector. Another indication of public-sector interest in incorporating cryptocurrencies is the movement towards allowing cryptocurrencies to be used for fees and taxes due to the state. While it was groundbreaking during 2017 when multiple Swiss Cantons announced decisions to accept cryptocurrencies, as we enter 2018 other instances are appearing, across wider regions, of public sector actors accepting, or considering accepting, cryptocurrencies for tax payments or government fees, as the Petro will be. If one definition of an ‘official’ currency is acceptance for tax payments, de facto public-sector recognition of cryptocurrencies may be much closer than many would consider.
Transparency and Sovereign Finances
Another central element of a state-backed cryptocurrency is the issue of transparency. By incorporating a key element of its finances onto a publicly verifiable blockchain, states are both establishing, and willfully subjecting themselves to, a much higher level of transparency.
There are multiple layers to this argument. One is the question of visibility related to government finances. If Venezuela proposes, for instance, that it will sell tokens equivalent to 100 million barrels of oil, a blockchain will allow observers to see if the equivalent of 250 million barrels was actually sold. This forced transparency removes one aspect of the fiscal and monetary flexibility of states, and willingly choosing to forego that flexibility is a substantial decision on the part of a national government.
Transparency could also allow the external tracking of currency holders and potentially even identification of individual accounts. But in a context where the holding of positions in the financial instruments of different sovereign entities is a well-established tactic on the part of numerous activist funds and investors, whether tokenized assets held on a blockchain introduce new dynamics into those relationships remains to be seen.
Illustrating the potential implications in the regard, the African Development Bank provides one example of how vulture funds work, buying distressed debt on secondary markets, then suing the debtor nation for full repayment when or if a debt consolidation is announced. While harmful to debtor nations, Vulture Funds often realize returns of 300% to 2000%. Argentina’s own history with the so-called Vulture Funds is one of the most widely known instances of this practice. While the case of Vulture Funds may be an extreme example, the more commonplace practice of tracking foreign holders of a nation’s debt, or the composition of a nation’s foreign reserves, could also take on new dimensions in a blockchain-based system where, despite anonymity, some methods of analysis can often allow accounts to be identified.
Stablecoins and Commodity Backed Cryptocurrencies
Efforts to develop a functioning stablecoin have received considerable attention within the crypto space, yet a truly stable, scalable, decentralized and universally accepted one one has remained largely elusive. The issue of a commodity-backed cryptocurrency emerging to serve as a legitimate stablecoin is something we consider to be virtually inevitable. Numerous efforts have already been developed along these lines, most notably perhaps DigixDao and HelloGold, both of which issue tokens representing one gram of vault-held physical gold. That oil, the world’s largest traded commodity by volume, would also emerge as the backing for a proposed stable coin is unsurprising. In this sense, the Petro is not even the first proposal to tokenize oil holdings. While some attempts strike us as rather contrived (see, for instance, the Oilcoin whitepaper and the description of the complex basket of assets it will hold in an effort to replicate the oil price) the Petro’s structure, with a token whose price will be directly correlated with the contract price for a Venezuelan barrel of oil, seems to be transparent and straightforward. (Whether one wants their stablecoin backed by oil or another commodity is another matter, perhaps best left to personal taste and individual investment philosophy, but at least the market is large and liquid enough that excessive manipulation is unlikely to occur to any great extent.)
Other attempts to develop asset-backed cryptocurrencies are also underway, as in the case of Australia’s largest gold refiner, the Perth Mint, which is creating a gold-backed cryptocurrency in 2018, and in England, where the Royal Mint is developing the Royal Mint Gold (RMG) token, also representing one gram of vault-secured gold.
Overall, the ecosystem of commodity-backed cryptocurrencies is growing, and the Petro is hardly unique within this context. If anything, the Petro’s simple, direct link with oil--unlike for instance, OilCoin’s less direct relationship, or HelloGold’s somewhat complicated process for determining emissions of its gold-backed GBT Token--resembles the pattern of gold-backed tokens such as the RMG token, where each token represents one gram of gold in a simple, direct relationship. Interestingly, despite the various controversies around the Petro, Venezuela is also looking to encourage OPEC to establish its own oil-backed token. One wonders, regardless of the Petro’s eventual fate, if a similar initiative backed by OPEC rather than Venezuela alone could not emerge as a global favorite for commodity-backed stablecoins?
Bypassing Traditional Securities Markets
Just as discussions of token offerings consistently reference the way blockchain-based tokenized investments are allowing startups to avoid traditional venture capital investments, and ultimately equity sales and traditional securities markets altogether, seeing a state take a similar path shouldn’t be too surprising. Given the well-established mechanisms for states to bring a variety of financial products to highly liquid markets, there might seem little need for states to look to raise money outside of traditional settings. In reality, there are a number of instances where such an approach could be appealing. The case of Aramco, for instance, where discussions are underway for the possible sale of a limited equity stake in Saudi Arabia’s national oil company, provides one example. Some reports have indicated that one potential challenge facing Saudi Arabia is the question of finding the ideal listing venue, with some exchanges balking at the proposed valuation, others requiring greater disclosures than Saudi Arabia is prepared to make, and other exchanges being described as lacking the necessary liquidity to host the IPO and subsequent listing. A blockchain-based, tokenized sale for a portion of ARAMCO’s equity could simplify some of these issues. If decentralized exchange infrastructure emerges as a viable vehicle for trading, the need for centralized exchanges to support secondary markets could greatly diminish, opening wider the path for ‘unregistered’ offerings that traditional financial infrastructure might not support.
Bypassing the SWIFT System
An additional reality of a blockchain-based tokenized offering is that such an offering is, regardless of whether by design or merely incidentally, effectively outside of the confines of the traditional financial system. A core element of the existing financial system is the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, a Belgium-based cooperative for the communication of financial transactions. The SWIFT network processes payment-related information and is at the center of communications across the global financial system. Efforts to move outside the SWIFT system represent two particular points of significance.
One is that the SWIFT system has been hacked on more than one occasion, with millions of dollars stolen, (SWIFT representatives blame members and say the fault was not theirs, but from an outside perspective the crucial point is that the system is not ironclad.) Exploring alternatives offers the possibility of more effective and secure transactions.
Second is that the SWIFT system has effectively been politicized as governments have sought access to SWIFT transaction data and made access to the SWIFT network subject to different conditions upon identity or behavior, effectively employing SWIFT as a vehicle for pressuring states and individuals to behave in certain ways as a tool of international relations. While many would argue that instances of such behavior were justified by unique or egregious circumstances related to individuals and behaviors clearly outside the bounds of established norms, it nevertheless remains true that once a system has been politicized, the potential for further politicization, perhaps in a less justified circumstance, cannot be ruled out. Given these concerns, the opportunity to move to the more neutral setting of a blockchain-based environment has obvious appeal for many.
Conclusion: Towards a New Era of State-Backed CryptoCurrencies?
Looking beyond the immediacy of the Venezuelan aspect of an actual state-backed cryptocurrency, allows an appreciation of some of the wider issues at play. From our perspective, where we have been both anticipating the emergence of state-backed cryptocurrencies and reflecting upon the range of significant issues inherent in such a development, we admit to a certain disappointment that so little attention has been focused on the broader issues. We will be very curious observers when the Petro pre-sale begins—in part to see whether the obvious attempts to impede the Petro’s success that have come from within Venezuela and beyond the country’s borders have the intended effect—and look forward to continuing to explore the critical questions the Petro has brought into focus. These questions, for the reasons suggested above, will ultimately prove to be of a significance far greater than the Petro’s individual fate.