OPEC cryptocurrency’s interesting economics

 By Chris Dalby

Bad news has been pouring out of Venezuela of late, as the country suffers from rising inflation and a scarcity of essential goods. The country’s foreign debtors have also been circling, and economic sanctions have taken their toll…

However, the country still has the world’s largest reserves of oil and holds sway within OPEC. Last year, President Nicolas Maduro announced a plan to create a Venezuelan cryptocurrency, the Petro, not tied to any global reserve currency. The evolution of that idea led him in February to suggest an OPEC cryptocurrency.
Since its launch, the Venezuelan Petro is one of the first, if not the only, cryptocurrency backed by highly tangible assets — the country’s oil, gas, gold and diamond reserves. As the name Petro indicates, oil is the foremost among these. Maduro’s economic argument is that this would circumvent the risk of cryptocurrencies, being entirely virtual, and would allow oil trading to take place in a far freer way between governments, companies and even individuals.
The concept has been blasted both within Venezuela and abroad, including U.S. lawmakers like Senator Bob Menendez, who has raised concerns that the South American country will use it to avoid financial sanctions.
Opposition lawmakers in Venezuela have also cried foul over the proposal, with one calling the move “illegal.”
“This is not a cryptocurrency, this is a forward sale of Venezuelan oil,” legislator Jorge Millan was quoted as saying by Reuters at the time.

Venezuela's President Nicolas Maduro reads a document during the event launching the new Venezuelan cryptocurrency Petro in Caracas (Reuters)

The success of the Petro is yet to be proven, despite claims of generous sales. While Maduro has said it has generated millions of dollars in sales, three has been no independent verification of that number. Actual tangible evidence of the Petro’s value and use will need to appear before those doubts are assuaged.
International criticism has been scathing of the project. The Chicago Tribune called it “one of the worst investments ever.”
However, if it is a hollow project, Maduro is certainly doubling down on it.
In recent weeks, he has announced that currency exchange points will be opened in hotels and tourist resorts where the Petro will be openly exchangeable. In early May, the luxury Humboldt Hotel in Caracas re-opened, following a lengthy restoration, with Maduro personally attending to announce that the hotel’s services could be paid for in Petro with a currency exchange in the lobby. As the hotel is to be operated by the Marriott group, this would seem to add some credibility to the project.

OPEC cryptocurrency

However, Maduro’s ambitions have not stopped there. The suggestion of an OPEC cryptocurrency was apparently made directly to OPEC secretary-general Mohammed Barkindo.
Maduro promised to send a joint proposal for the cryptocurrency to be developed by the 14 countries making up OPEC: Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.
This has been part of a show of force and influence by Venezuela, seeking to overcome its growing international isolation by maintaining an active presence and voice within OEPC. Maduro has been stalwart in asking for the renewal of an agreement between OPEC and other producers to cut oil production. In December 2017, this deal saw OPEC members agree to cut production by 1.2 million barrels a day on top of 600,000 barrels a day less from non-members.

Venezuela's President Maduro speaks during a meeting in Caracas (Reuters)

However, despite Maduro’s active campaign, developments for an OPEC cryptocurrency since then have been thin on the ground. He has seemingly been more focused on the domestic sale of the Petro, as a first step. Should it succeed, he may return to the subject matter of OPEC.
That eventuality is looking unlikely. A Brookings Institute report, after careful analysis, said that the Petro is not really a cryptocurrency and that it “cannot stabilize the Venezuelan economy and instead exists to create foreign currency reserves from thin air.”

Impact of the Petro

If the Petro seems unlikely to be taken up without OPEC, what will be its legacy? For starters, given the unregulated nature of the cryptocurrency market, it creates a business model for countries to trade their energy resources without worrying about sanctions or being monitored. Since Venezuela’s announcement, a number of other countries have made similar plans. Iran’s Post Bank is working on a cryptocurrency, Turkey has followed suit, even naming it ‘Turkcoin”, and Russia on the is planning a currency, with the wonderful steampunk name of “crypto ruble.”
Estonia is beginning its own coin, Japan has recognized Bitcoin as legal tender.
The economics posed by national cryptocurrencies are fascinating. Whether an oil-backed cryptocurrency, or one with its value pegged to any tangible asset, would even work remains to be proven. If it works, however, it would change the concept of the coins, which have been criticized for only having value as long as users assign it said value.
An oil-backed cryptocurrency would be a revolution as it would radically democratize access to oil reserves, allowing for peer-to-peer trading, even in the poorest parts of the world. It would lessen market volatility since the value of the currency would fluctuate based on current oil prices.
However, its risks are also evident. While average people could face a low barrier to entry as oil traders, the chance for rampant speculation, corruption and money laundering are also present. How OPEC regulates and controls this endeavor will be crucial.

about the author
Chris Dalby
Journalist. Editor. China, Mexico, Latin America, Asia, place branding, Olympics, oil and gas, mining, renewable energy, international politics.