On February 20, Venezuela launches the pre-sale of its oil-backed crypto-currency, “petro”. It is the first sovereign issuance in the world of a crypto-currency as its legal tender.
Whether or not petro can help Venezuela alleviate its current economic woes, Dagong believes its very issuance is significant in that its value is claimed to be backed by such material wealth as crude oil, natural gas, or gold, so that it differentiates from all existing virtual currencies for their lack of credit anchor. The effort can generate useful lessons on how defects of the international currency system can be mended so that the system can return to its basic value. Dagong’s views are as follows:
I. Petro plays a positive role in breaking away from sheer virtuality of the existing digital currencies. It may help the global currency system return to its basic value.
Different from such crypto-currencies as bitcoin, petro’s credibility, as endorsed by the Venezuelan government, is backed by its oil and gas reserves and gold. This is a breakaway from the virtuality of all existing digital currencies, and may help petro avoid speculation and fluctuation in its prices. Its sovereign issuance also lends to its legality. Petro thus combines the feature of digital currency and the backup of material wealth. It is a bold effort in currency innovation in the digital time, and may generate very useful lessons on how the global currency system can return to its basic value.
II. Petro also provides some new thinking for reform of the international currency system.
Since the collapse of the Bretton Woods system, the international currency system is characterized by the domination of US dollar over the coexistence of a number of other currencies such as the Japanese yen and euro. However, the credit foundation of US dollar has been weakened continuously by the country’s issuance of currency in excess of its wealth creation ability. It has created a systematic discrepancy between the US dollar-dominated, credit-based international currency system and the global system of value creation, and all the biases and imbalances in the international distribution of credit. The frequent occurrence of credit crisis is evidence of the inadequacy in the US dollar to effectively play the role of the international reserve currency. Under such circumstances, the innovation of petro may provide useful lessons for all countries to explore and experiment with new forms of currency backed by material wealth and good for cross-border payments and international financing — in the likelihood to have a new international currency not influenced by the current US dollar-dominated international trade settlement system, and in the effort to help the international currency system return to its basic value and stability, and steer clear of the credit risks arising from the reserve currency issuer’s unbridled use of credit.
III. The sustainable development of a digital currency must be based on its issuer nation’s wealth creation ability.
Petro’s current backup resources are not renewable. The sustainability of its value will depend on Venezuela’s overall wealth creation ability, of which natural resources make up only a part. The diminishing of existing wealth, if not replenished by new wealth creation ability, will inevitably erode the value anchor of such a currency. A nation’s incremental wealth creation ability is the key to its virtual currency’s credibility. In the case of petro, it must rely for its sustainability on Venezuela’s recovery in wealth creation ability. Once its issuer nation breaks away from restrains of its incremental wealth creation ability, the currency price will deviate from its value, and set the stage for a new credit crisis.
Dagong will be watching closely what will become of the Venezuelan petro.