Problems with the Petro

I recently made a post on outlining the issues I see with Venezuela’s announced Petro cryptocurrency.  Below is an edited re-post of those thoughts with some extra links to official information and other good sources of discussion.

I have some strong opinions on the Maduro government, but I’ve tried to keep this argument tied to the facts that are known about the Petro.  Many of those facts come directly from the official information that has been made available by the Venezuelan government.  That information has been changing over time, but I kept copies so here are three sources for the white paper:

Since the switch to the NEM blockchain, there has been no official announcement giving the specifics of the Petro pre-sale token.  @SrMiguelV spotted this set of “mosaics” on the NEM blockchain that fit the description.  But, without confirmation there is no way to know for certain that is the authentic Petro token.  As of this writing, none of the tokens have yet been transferred.

Having read the Petro Whitepaper (all of the versions above) as well as the announcements coming from Maduro and other government officials, I can’t imagine why anyone would invest in the Petro unless it’s to make a political statement.  There are too many good opportunities out there, and the Petro shows too many signs of a poorly-engineered play to take in hard fiat currency and cryptocurrency in exchange for vague promises of an asset-based cryptocurrency.  The biggest problems with this coin are:

(1) It’s not really backed by oil.

The Maduro regime says the Petro “backed by oil” and that claim is being repeated by those following the story, but there is no official communication on how that backing works.  There seems to be a perception that one Petro will be equal to one barrel of crude oil, but I can’t find anything from the Venezuelan government that explicitly makes that commitment.  In fact, there is a formula in the white paper for the redemption value in Bolivares and that equation has a “Dv” discount factor that is set by the Venezuelan government.  In other words, they set the value of the Petro.  To actually back the Petro in oil it must be directly redeemable.  Not necessarily by individual investors, but as an example – if China were buying 1mm barrels of crude oil from Venezuela and paying in Petros, the price should be 1mm Petros.  There is no document that makes that commitment.

(2) Even if it were backed by oil now, there is no reason to believe it would stay that way.

Even if there was some specific commitment to peg the Petro to some amount of oil, who would hold the Venezuelan government accountable?  Their typical pattern would be to start off with a commitment like that and then declare some sort of emergency or economic warfare that means they need to devalue the coin.  No matter what you think about the politics and the truth behind those stories, the fact of the matter will be that the Petro gets devalued and investors will lose money.

(3) There is almost no technical information available about the Petro blockchain.

The idea is that the current pre-sale tokens will be converted to a Petro that will run on it’s own own blockchain. But, that blockchain does not yet exist and the only technical details available about its design are a few vague lines in the whitepaper.

What we do know from the white paper is that it won’t be mineable, meaning the government issues all the coins.  That is not the way any successful blockchain so far has been built – mining (or forging for proof of stake currencies) is what provides the incentive to run nodes and create a decentralized self-policing infrastructure.  There is a vague statement that proof of stake might be supported, but that would be at the discretion of the Venezuelan government as well.

What is being sold right now is a promise to convert the NEM token into some future cryptocurrency on a blockchain that we know very, very little about.  Without publicly available code for the blockchain, there is no way to know what it is that you are buying.

(4) There have already been technical shenanigans.

The Petro website and white paper both specifically said that the token would be issued on the Ethereum blockchain.  Then, the day of the resale it was announced that it would instead be on the NEM blockchain.  At that point the white paper and website still said Ethereum.  (See the links above.)  I’m not an expert on the details, but going from one blockchain to another for a major token release is not something you just switch last-minute.  The NEM plan was in place for some time in advance for reasons unknown and unexplained.  It’s another clear example of the lack of transparency around this cryptocurrency.

(5) The team behind it is incompetent.

This coin is brought to you by the same team that manages the Bolivar which has collapsed in value.  They have also run pretty much every sector of the Venezuelan economy into the ground, including the PDVSA oil company which was once a source of national wealth.  You can debate whose fault that is all you want, but the fact of the matter is that if you have been holding Bolivars for the past few years your investment is now near-worthless.  Since the Petro is not really backed by hard assets and the regime has explicitly stated that they will set it’s value (in the white paper) there is no reason to think that its value will hold any better.  For more of my thoughts on the Maduro regime’s money management skills, see my post here.

I do think that some good may come from this crypto-scam.  Now non-Venezuelans who believe in the Maduro regime can invest in the Petro and experience a little bit of what Venezuelans (both pro-Maduro and opposition) have suffered for many years.  When people start losing their money, it may start to change some minds.

I obviously have some strong opinions on this given that my wife is from Venezuela.  But, no matter which side of the politics you are on I can’t see a rational reason to invest in this coin.  There are too many options available that are truly decentralized, transparent, and proven.

If you’re interested to read more, here are a few good articles and sources for information on the Petro:

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