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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