Original art by @modográfico

Public sale of petros began recently, but are they even legal, or worth buying?

The answer is “No” in both cases. However, because of its own inefficiencies, the government may manage to actually put petros into circulation in Venezuela. To understand this better, let’s try to answer some of the main questions surrounding this peculiar issue:

What is a petro?

That’s difficult to define. Two features, however, are worth mentioning:

  1. Petros are assets issued en masse by the State. Yes, blockchain technology is involved, but that doesn’t change the legal approach; they probably qualify as securities issued by the State, in the broad terms of Venezuelan law (which are different from the U.S. law approach);
  2. Petros are “backed” by oil reserves — even if such backing may be ineffectual (and even illegal) in practical terms. A presidential decree has identified and set apart a portion of heavy oil reserves at the Orinoco Belt for the petro, but numbers don’t add up. From an economic standpoint, such oil backing seems insufficient, but the executive branch of government assumes the obligation of exchanging petros for oil, creating rights for investors (even if such rights aren’t worth much). Assuming that the executive is constitutionally allowed to do this — an assumption we don’t share — these rights amount to a guarantee issued on the petro.

Can a petro be considered public debt?

Venezuelan law explicitly tags issuing securities and granting guarantees as public debt if the State is involved. It may be argued that, in legal parlance, petros qualify as public debt, more cryptobond than cryptocurrency.

However, the mere fact that we see petros as public debt makes them illegal, for two reasons: public debt requires approval of the National Assembly (which it lacks), and oil reserves cannot be encumbered, which is what the executive is trying to do. These limitations are imposed by Constitutional and legal statutes, and their violation would render petros null.

Why would investors buy illegal debt issued by a defaulting State?

The government offers benefits worth the risk. It’s the only explanation we can think of.

According to the whitepaper, the government is committed to promote petros in the domestic market to stimulate its acceptance worldwide. Furthermore, specific references to possible use are described: the government would use petros to make payments (including those due by State-owned companies) and would receive petros for certain transactions (such as taxes, fees and contributions); the government is going to promote the use of petros by the private sector too, with statements by public officials — including the President and the Cryptocurrency Superintendent — reinforcing it.

The government aims at creating a real petro exchange, then. The first step is declaring its acceptance of petros as means of payment, both in the public and private spheres. This would give petros a real exchange value.

But something’s got to give, because bolivars also have exchange value.

Why choose petros over bolivars?

Petro dealings must be made attractive, must have additional benefits. How? Through direct and indirect means.

Petros are means of payment and exchangeable instruments, even if a conversion rate (determined by the price of Venezuelan oil, outside the government’s control) is necessary. A petro/bolivar exchange rate is determined, on the other hand, by “authorized exchange offices”, which may or may not be within the government’s control. If such control exists, the government may fix a favorable rate to petro holders, creating an incentive for acquisition.

But the bigger issue regards a wider market, which depends on petros being exchanged for other cryptocurrencies, and these for hard currency. This wider market should be possible under rules the government has approved, and this market should establish the petro’s real value.  

The government may create an explicit incentive by applying an attractive discount for taxpayers disbursing petros, but if the primary acquisition of petros (which is far from transparent) is conducted at a favorable rate to investors, the benefit may be implicit. The same applies for the acquisition in the secondary market if the price of petros in the real market is low compared to bolivars, but the conversion rate used by the government to accept them is higher.

Another tool available to the government is to dump petros on its unpaid creditors (debts owed to contractors, partners, etc). Would it be legal to force them to receive petros? No — petros are not the official Venezuelan currency, and introducing a different one requires Constitutional changes.  

Why would creditors agree to receive petros?

Because they may either receive petros or nothing at all.

The government is in selective default and creditors are having trouble collecting payments. Perhaps receiving petros which, in turn, they can use to pay taxes or labor related obligations, may be just the right incentive.

This works, of course, if creditors are not subjected to sanctions by the U.S. government. Petros were questioned by the OFAC, Department of Treasury, as early as January 19, 2018, and on March 19, specific sanctions came in a new executive order applicable to “digital currency, digital coin or digital token.” So, if petros are considered debt, dealing in petros would be forbidden by the previous regulation, and if considered digital currency, by this new order.

The government is sure to call the petro a success and its ability to place petros a major accomplishment. But is that actually so?

“Forcing” creditors to receive petros is very likely to cause impact: petros dumped on creditors would bring down the petro’s real value. This, in turn, will cause others to acquire cheap petros to pay taxes and other obligations. Will the government accept the petro depreciation and reflect it on the authorized bolivar/petro exchange mechanism? Will it artificially maintain a higher exchange rate accepting devalued petros for a higher value? Will it burn hard currency to prop up the petro?

There is no doubt that, with petros dumped on creditors, dealings in petros may take place, but will this benefit the State? Is this a sign of strength? An achievement?

We doubt it. The government will keep receiving payments in an increasingly worthless currency. So petros will be traded, yes, but to the detriment of the State, which will be placed in the dilemma of throwing away good money after bad, to artificially maintain its crypto value.

In other words, petros may come to nothing.

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15 COMMENTS

  1. “The government will keep receiving payments in an increasingly worthless currency. So petros will be traded, yes, but to the detriment of the State, which will be placed in the dilemma of throwing away good money after bad, to artificially maintain its crypto value.”

    The state sold them for real dollars and euros. Pure gain. They get them back for tax payments that could be paid in bolivars. So the state gets dollars for taxes, pure gain. The taxpayer pays bolivar denominated taxes with dollars and euros, pure folly.
    The state is throwing “good money” (tax bolivars) after “bad” (dollars and euros)?
    Are you kidding me?

    • Well there is no evidence that they actually sold any for real money. The blockchain where the Petro lives hasn’t had any petros moved.

      Now they claim the sold heaps of them. But I think what really happened is that they got of a bunch of “I’m interested” letters, most probably fake, and considered those sales. To date they haven’t executed any trades.

  2. I am aware of the Oil designation, and the terms of Decree 3,196. The White Papers made no mention of oil backing or any contrato compra-venta. Does that appear in a blockchain contract? Is there any actual proof that the regime carried through with the attempt to back it with oil contractually?

  3. Have you considered the russian angle? This is reportedly a beta test for the russkies, who might have more capabilities and interest in a positive outcome than any of the locals (aside from Gabriel Jimenez and his 7.6% of all petros, of course).

  4. Not sure I understand the use of Petros to pay taxes , taxes are in bs , petros are tied to the value of its purchase which set at the price of a bl of oil in foreing currency , so if petros are to be paid then they would have to be at least notionally exchanged for bs at a rate that is comparable to the market exchange rat of bs per US$ , if what is allowed is an amount of foreing currency exchanged at the official rate then the taxpayer paying in Petros has to take the loss resulting from applying the highly unfavourable exchange rate …..

    Now if an unpaid creditor is paid in Petros in order to use it to pay taxes it would have to have had enough net taxable income to be under an obligation to pay taxes which I doubt would be the case for most of such companies whose business have been affected by the govts lack of capacity to pay its creditors on time the full value of their services…..

    Its clear to me that offering in situ oil as collateral to support the value of the Petro cant work both because legally such oil cannot be mortgaged as per Venezuelan law and second because how would that work ?, one the petro is issued there is no obligation on the part of the issuer to buy it back so absent an obligation what is it that the oi bl in situ is going to support ??

  5. I am wondering if the guiso will work like this: 1) gov sells petro for hard currency to foreign company (forced sell…as in ‘you may not do business in venezuela if you don’t purchase Petros ‘)
    2) government forces all remittances to be paid with Petros
    3) government re-sells these Petros over and over again, each time gaining hard curency
    4) only entity to be allowed to trade in Petros will be said government
    4a) plan extended to include all foreigners or tourists needing currency or exchanges

    • “I am wondering if the guiso will work like this: 1) gov sells petro for hard currency to foreign company (forced sell…as in ‘you may not do business in venezuela if you don’t purchase Petros ‘)”

      So basically you are saying that foreign companies need to pay to do business in a country that will not allow them to make hard currency. No sane business would go for that. Additionally, and this is not a minor thing, Petros are part of the US sanctions, so it is a great risk for a lot of international business to engage in them.

  6. A couple weeks ago the US specifically included the Petro in the financial sanctions against Venezuela, meaning no $US transactions, which carries over to anyone trying to do business with the dictatorship. Play all they want with their funny monies in country, maybe with yuans and rubles, but it isn’t going broadly international.

  7. Thanks. I hadn’t considered that the government itself will pay its own creditors with petros and then take them back as payment for taxes. What a joke.

    • A scam. The government will try to pay hard currency debt with Petros and take them back for taxes due in Bolivares. They are trying to collect taxes in hard currency.

  8. Very interesting article.

    Countries used to back their currency with precious metals such as gold. Later, currencies were fixed in price, or within a price range, relative to a reserve currency (“pegging” currencies). Both were scrapped in favor of free-floating exchange rates which prevail today – for various reasons, one of which was the inconvenience of not being able to inflate domestic currency to lower the real value of domestic government debt, and another of which was not being able to freely depreciate domestic currency to boost exports and lower the outflows of real money dedicated to the purchase of imports. Trying to maintain a “peg” became costly for relatively poor economies. In view of that, it seems somewhat odd that the regime would want a “stable” currency, pegged to the price of oil.

    All of the complicated details of the economics will work themselves out. One sentence popped into my head while reading the article: “Socialism, meet free markets!”

    It will be interesting to learn the actual prices assigned to the Petro, and its actual trading volume. I confess I do not really understand cyber / crypto / currencies, like Bitcoin. To me, Bitcoin is a medium of exchange, and its value is in its use to make transactions. One of those values, from what I understand, is the lower cost of decentralized accounting and exchange. The rest is speculation on its adoption, it seems. For example, some companies, with people smarter than myself, have said they are looking at the block-chain mechanism with interest, but clarified that does not mean they are buying Bitcoin to use for their transactions.

  9. You can assign a price in the initial offering of the Petro, but the price on the secondary market is what determines the price between willing buyers and sellers. Even if delivered, carrying around a barrel of oil is not the most convenient way to pay for goods at a store, so the value of the Petro would be in speculation, and conversion to another currency to realize any profit. But then you have to trust an exchange to redeem your cash – and they can and have pulled the plug with no notice. Fun exercise: try to find the address of any coin exchange. They’re usually mail drop addresses, most often in some place in the world far from you. And that doesn’t even tell you where the actual business is.
    Bitcoin isjust a derivative of money. Even if stores offer to take Bitcoin they usually immediately convert it into local currency or USD, hopefully fast enough so the Bitcoin price they sold their goods at (which is a function of conversion to currency) will represent the value they hoped to receive for their goods. Of course, some businesses may retain the coins as a speculation if they’re so inclined, but even if they choose to save it for their own transactional purchases the value will constantly fluctuate because it is adjusted to local currency. They could end up selling goods low and buying high. Or vice versa …
    Also note that in the case of Bitcoin, transaction costs are very high – something like 19 dollars per transaction, and it’s slow, so its whole purpose has been defeated. You could just pay by credit card, clear your balance by the end of the month, and pay no fees at all.

  10. Side story on the Petro. Recently heard that Ven wanted oil tankers to start paying port fees in Petro, thereby creating a market for them. Unfortunately if it’s destined for the US or involves a US company, then Petro cannot be used and the cargo will sit.

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