Venezuela's cryptocurrency is just a desperate gimmick - BBH

Venezuela has issued the world’s first sovereign cryptocurrency and analysts at Brown Brothers Harriman explained that they think this is just a gimmick that cashes in on the current crypto craze that aims to circumvent existing sanctions and avoids addressing the nation’s deep structural problems.  

Key Quotes:

"Investment Outlook

Venezuela launched an oil-backed cryptocurrency called the petro last week.  The deal was first announced in December.  Details remain sketchy, but (at least for now) a petro is meant to represent a claim of some sort on Venezuelan crude oil.  President Maduro has at times said that the petro is backed by the country’s oil reserves, at other times that it reflects the price of a barrel of oil.  However, there is no specific mechanism in place yet.

Maduro’s comments suggest that the value of a petro should somehow be determined as a combination of oil prices and credibility of the Venezuelan government.  By definition, cryptocurrencies are decentralized and not dependent on some sort of authority like a central bank or government.  By issuing a cryptocurrency that’s implicitly backed by a centralized entity, Venezuela is moving into a gray area.  

That this particular government has little credibility and can seemingly do no right simply compounds the problem.  Last summer, the Maduro government started laying the groundwork and created the Superintendency of Cryptocurrency.  A senior member of the constituent assembly was put in charge, despite having no experience with cryptocurrencies.  Rather than building its own blockchain system to create the petro, officials decided to build within an existing network.  However, there have been conflicting accounts as to whether its Ethereum or Nem.

The government put 38.4 mln petros on private pre-sale that runs through March 19.  These will be sold with a series of increasingly smaller discounts in an effort to boost early demand.  After that date, another 44 mln units will be sold in a public Initial Coin Offering (ICO).  These units will also be sold with four increasingly smaller discounts for each 5 mln sold until the fifth and final tranche of 24 mln units is sold with no discount.  

A total of 100 mln units will be sold, with the government reserving the remaining 17.6 mln units.  Officials say that no more petros will be created unless approved by the Superintendency for Cryptocurrency.  The government believes Venezuelans will eventually be able to use the petro to make payments to government institutions, including tax payments.  However, it appears that petros can only be purchased with USD.  This makes the use of the petro as a medium of exchange for the local economy basically impossible.  

The opposition believes issuing the petro is an illegal act by Maduro.  Because it appears to be a form of debt, they claim it must be approved by the legislature.  The US Treasury has also weighed in.  Officials have warned that the petro "would appear to be an extension of credit to the Venezuelan government" and could "expose US persons to legal risk" if they invest in the scheme.

Note that Venezuelan Economy Minister Zerpa visited Russia last week.  Press reports suggest that discussions will center around the petro.  This could have several angles, since 1) Russia is a creditor to Venezuela and restructured its debt last November and 2) Russia is also subject to international sanctions and may be interested in ways to circumvent them.

President Maduro said late last week that Venezuela is preparing another new cryptocurrency called “petro gold” that will be backed by the precious metal.   It’s clear that Maduro and his policymakers really don’t understand what a cryptocurrency is and what it is meant to represent.  If investors wanted assets backed by oil and gold, why not just buy the commodities themselves?

US sanctions remain in place for the foreseeable future.  Besides targeting various individuals in the Maduro administration, the sanctions have also effectively prevented Venezuela from raising money in international markets by banning any US trading in new Venezuelan bonds.  This has contributed greatly to its inability to service its external debt.

S&P moved Venezuela to Selective Default on November 13.  It noted that Venezuela had “failed to make $200 mln in coupon payments for its global bonds due 2019 and 2024 within the 30-calendar-day grace period.”  Fitch was next and moved Venezuela to Restricted Default on November 14.  Inexplicably, Moody’s has keep its rating at Caa3 since January 2015.

Venezuela has not clarified what it plans to do with regards to its debt.  While Maduro has tossed around notions of restructuring, so too has he pledged to honor the country’s obligations.  The World Bank estimates Venezuela’s external debt at $113 bln at the end of 2016.  To us, the issuance of petros is simply a gimmick to raise money even as sanctions choke off the economy.

Our own sovereign ratings model shows Venezuela’s implied rating at D.  What will Venezuela do with the petro proceeds?  Will it resume servicing its external debt when reserves are dwindling and its own citizens are facing chronic shortages of food and medicine?  Or will the money be used to buy basic goods for the impoverished populace?  No one except Maduro knows for sure."

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