Yesterday Venezuela began pre-sales of its petrocurrency, called the petro. The idea is that each token the government creates will be freely exchangeable into Venezuelan bolivars at the previous day’s price of a barrel of a specified Venezuelan crude oil produced by the national oil company. According to the Washington Post, $735 million worth of the tokens were sold on the first day.
For people with money trapped inside Venezuela, the petro may have some utility, since it will be accepted by Caracas for any official payments. For such potential users, the fact that the government determines the dollar/bolivar exchange rate and that a discount to the crude price will be applied are niggling worries.
The wider issue, which remains unaddressed in this case, is that the spirit behind cryptocurrencies is a deep distrust of government, a strong belief that practically no ruling body will do the right thing to protect the fiscal well-being of users of its currency.
In Venezuela’s case, just look at the bolivar. The official exchange rate says $US1 = B10. But the actual rate, as far as I can tell, has fallen from that level over the past year or so to $US1 = B25000.
a little history
The more serious worry is that the history of commodity-backed currencies isn’t pretty.
In the 1980s, for example a struggling Mexican government issued petrobonds. The idea was that at maturity the holder could choose to receive either $1000 or the value of a specified number of barrels of Mexican state-produced crude. Unfortunately for holders, Mexico reneged on the oil-price link. My recollection (this happened pre-internet so I can’t find confirmation online) is the Mexico also declined to make the return of principal on time.
The fate of gold-backed securities around the world during the 1930s isn’t so hot, either. The US, for example, massively devalued (through depreciation of the gold exchange rate) the gold-backed currency it issued. It also basically banned the private ownership of physical gold and forced holders to turn in the lion’s share of their holdings to Washington in return for paper currency.
In short, when the going gets tough, there’s a big risk that the terms of any government-backed financial instrument get drastically rewritten. This recasting can come silently through inflation. But, if history holds true, government backing of a commodity link to financial instruments gives more the illusion of protection than the reality–especially so in cases where the reality is needed.