Venezuela ties its currency to a state-run cryptocoin

Venezuela has just taken drastic and unprecedented steps to stabilize its currency as it grapples with hyperinflation and other economic issues. The country’s currency has not only been massively devaluated and renamed, but is now tied a state-issued cryptocurrency called the Petro, which itself fluctuates based on oil prices. Hardly anyone knows what to expect out of this.

The Petro is not new; it arrived earlier this year in the form of a stepped offering to private and then public buyers, raising more than $3 billion from foreign governments and presumably some private buyers. President Trump forbade the U.S. from taking part.

Although it is supposed to be a liquid asset reflective of the price of oil, and there is of course a whitepaper that describes the system in broad strokes, though it lacks almost any real technical detail. But the country’s own national assembly called the state-issued cryptocurrency unconstitutional, and blockchain industry experts have called it a scam. Bloomberg has a good roundup of official communications about the token.

The scheme originated in the administration of Venezuelan President Nicolas Maduro and seems to be an attempt to lend some credibility and stability to the country’s currency. The strong bolivar, which has lost more than 90 percent of its value over the last decade, has been renamed the sovereign bolivar and artificially returned to pre-inflation values. In practical terms that means a loaf of bread that cost 100 bolivars in 2012 and 100,000 last week will now, theoretically, cost around 100 again. Whether that will actually happen — the black market rates are probably more influential — is anyone’s guess.

In case it isn’t clear, I’m not an economist and don’t plan to become one. But this is an historic moment in the blockchain world in that it is the first time an official fiat currency has been pegged to a state-run cryptocurrency. That makes it of interest to the international community for many reasons, although obviously this is far from the ideal method by which one might want to demonstrate such a system.

Although this whole situation is nominally of interest, it seems unlikely to benefit the people on the ground in Venezuela who have no use for oil-based cryptocurrencies and just want to buy some bottled water, a package of diapers, and a train ticket out of the country. How this all plays out will no doubt be instructive but let’s not lose sight of the humanitarian crisis playing out on the streets. Here as elsewhere, donations can help.

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