Venezuela wants to solve its economic crisis with an imaginary new currency

Venezuelan President Nicolás Maduro has announced that he will be introducing a digital currency called the “petro” in a desperate bid to dodge strict US sanctions. But analysts are skeptical the move will fix the country’s ailing economy.

During his annual televised Christmas message, which featured about five hours of song and dance, Maduro declared that “The 21st century has arrived!” and said that he planned to roll out a cryptocurrency backed by Venezuela’s oil, gold, and mineral reserves.

A cryptocurrency (see: Bitcoin) is a kind of virtual money that uses cryptography, a complex process of encoding data, to keep transactions secure from outside parties — like foreign governments looking to impose sanctions.

Maduro said the petro would help Venezuela “make financial transactions and overcome the financial blockade,” a reference to US sanctions imposed this summer on key figures of Maduro’s government in response to its recent political power grabs.

Venezuela has been struggling in recent months to make payments toward the $120 billion worth of debt it owes to foreign lenders and bondholders, many of whom are in the US. But because of sanctions that restrict some Venezuelan government officials from using the US banking system, paying back those lenders can be difficult if not impossible. The petro could theoretically help Venezuela get around the restrictions (and any future US sanctions) because it provides an alternative path for sending money.

But Maduro didn’t flesh out how the currency would work, how its value would be calculated, or when it would be launched.

Venezuela’s official currency, the bolivar, has lost almost all of its value against the US dollar this year. The country’s economy has descended into chaos in the past few years due to a plunge in global oil prices and a botched government response to the crisis. At the beginning of the year, the unofficial exchange rate that most Venezuelans use has skyrocketed from 3,000 bolivars to the dollar to 103,000 bolivars to the dollar — a phenomenon that has made it so that a two-pound box of pasta costs roughly 50,000 bolivars, which is over 40 percent of the monthly minimum wage.

Political opposition leaders criticized Maduro’s announcement and said that it would need congressional approval to be enacted. But that likely won’t be an issue for him: The president expanded his powers this summer, successfully pushing for the election of a special law-making body packed with loyalists that replaced the existing opposition-controlled legislative branch of the government.

The bigger problem, analysts say, is that this enterprise is likely doomed from the start.

The biggest problem the petro faces is that the international community doesn’t trust Venezuela’s government.

The petro will be backed by oil, gold, and mineral reserves. The Venezuelan government will have to establish a formula by which a certain unit of the petro equals a certain percentage of those reserves.

But Maduro’s government suffers from corruption and a lack of transparency. How will people doing business with Venezuela know whether or not to trust that formula if the government has a habit of disregarding the law?

“Who is to say they won’t change the formula every five minutes to their benefit?” Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, told me.

Venezuela’s existing currency is already struggling in part because of a huge loss of trust in its value. As de Bolle points out, the Venezuelan government printed out too many bolivars in recent years to try to finance its soaring budget deficits. That made the bolivar’s value plunge, which in turn caused investors to drop their holdings of it, causing it to fall further, and that created a vicious cycle of hyperinflation.

David Smilde, a scholar of Venezuela at Tulane University, thinks that Maduro is probably aware of the huge obstacles a new cryptocurrency would face — but still sees value in selling the idea.

“Most likely they are trying to find a clever way to borrow money against future production of oil, natural gas, and gold, which is controversial and arguably unconstitutional,” he says. “But the Maduro government has found that fooling some of the people all of the time is enough for them to stay in power.”