El Petro - how will a crypto token help Venezuela win its own 'war of independence'?

El Petro is the world’s first state-run crypto token convertible to oil. The use case is clear. Each ‘Petro’ is a contract for the future delivery of one barrel of oil. In part, El Petro is Venezuela's response to punitive economic sanctions, including the freezing of its assets. Will blockchain help Venezuela win its own 'war of independence'? Let's look at the fundamentals.

Why El Petro?

El Petro sets out its stall like this... Token buyers benefit from discounted oil. Token holders benefit from a stable store of value backed by oil reserves. Token sales attract foreign currencies. By holding many currencies in its reserves Venezuela becomes a more diversified investor. For transparency and security all transactions involving El Petro are recorded on an immutable distributed blockchain ledger.

Compelling use case

As a crypto, El Petro has a compelling use case. Even if viewed simply as an oil discount voucher, El Petro will translate into real world economic activity and mobility.

Demand for oil is not going away any time soon. Oil derivatives like gasoline, diesel and kerosene run our trucks, cars and planes. The United States armed forces alone says it needs $9 billion to buy 86 million barrels of fuel for operations in 2019. For perspective, that's close to one quarter of all 350 million barrels of crude oil Venezuela looks set to drill this year (based on 960,000 barrels per day in March 2019).

Stable token of exchange

So a token that is convertible to such a raw and condensed form of energy as oil should be in great demand. Thanks to constant demand it should behave more like a stable coin. This model is not new. The US demands that global oil sales be priced and transacted in US dollars. The US dollar remains relatively stable compared to other currencies, presumably as a result.

Every modern economy currently relies on oil for fuel and plastics. Constant demand for this oil props up the value of the paper that must be exchanged for it. The United States Federal Reserve issues this paper and this arrangement allows the US dollar to retain its privileged reserve currency status.

Sounder token value

Issuing the global reserve currency permits the United States to live far beyond its means. Some basic statistics illustrate this. For example, the cost of annual national debt repayments in the US actually exceeds total US GDP. Repayments are 105% of GDP! This compares to debt repayments of 25% of GDP in Venezuela.

Protecting the primacy of the US dollar also creates different priorities in national budgets. In 2017 the US spent $600 billion or 3% of GDP on its armed forces, whereas in Venezuela they are spending 0.5% of GDP on theirs. Whilst homelessness stubbornly persists in the US, in Venezuela the government has a housebuilding programme and has built 2.5 million units of affordable housing over the last 8 years.

So, whilst ahead in its adoption of blockchain, Venezuela's government is more conservative in how it manages its public finances. Rather like the US founding fathers and Bitcoin Maximalists, Venezuela looks to be trying to create a sounder store of value in El Petro that comes from proof of work, intrinsic value, or convertibility to something hard to mine.

Discount for users

But, El Petro isn't just about oil futures. It can be exchanged for goods and government services in Venezuela and efforts are underway to encourage adoption. Pensioners got their 2018 Christmas bonus paid in El Petro. They can use the token to pay for shopping. They can buy basics in government-run stores and 'luxuries' in department stores. Traki, the largest retail chain store in Venezuela accepts El Petro. Airlines have been asked to refuel with and to deliver tickets sales in exchange for the token. You can even use El Petro to pay the Venezuelan taxman!

Isn't this the evidence of real world adoption that crypto and blockchain fans and sceptics alike have been calling for?

The discount the token confers is also real. In spring 2018 Venezuela invited India to buy El Petro in order to enjoy a 30% discount on oil. This oil is no figment of the imagination. Venezuela's proven oil reserves are estimated at 300 billion barrels.

15% of oil will be sold for Petros

There are buyers too. In March 2018 Venezuela confirmed the equivalent of $735 million first day pre-sales of El Petro, with buyers over the first month from 127 countries. Then, on 14 January 2019, the Venezuelan President announced that 15% of future oil sales will be made in El Petro. Coming from one of the planet’s Top 20 oil exporters this 15% is not an insignificant amount. It should represent at least 50 million barrels of crude oil bought with El Petro tokens in 2019!

You can almost hear the traders salivating at the slightest whiff of profitable margin-trading. Energy-intensive industries must also be eager to lap up lower priced oil. After all, lower cost energy inputs (including human) deliver corporate profits. Why else would US corporations choose communist China for manufacturing? Cheaper oil and coal, like cheaper human labour, gets work done more profitably. In fact, clothes 'Made in China' are, for this reason, now apparently often 'Made in North Korea'.

Ex-pats frustrated by US sanctions

So, everyone must be looking forward to unbeatable discounts on oil and therefore cheaper consumer goods thanks to the oil-backed token?

Actually, no. The United States government isn't spearheading this crypto revolution. In March 2018 the President of the United States issued an executive order stopping US citizens transacting in any digital currency issued by the Venezuelan Government.

US sanctions currently threaten any business that might facilitate trade with Venezuela with fines, including fines of $1 million for financial institutions. So, faced with economic sanctions preventing trade, who can blame the Venezuelans for getting innovative? And does the US government really suppose that it will win the PR war by blocking Venezuelan ex-pats from buying Bitcoin on Coinbase to send home?

Resisting full spectrum dominance

If anything, this episode should make Venezuelan ex-pats start to question how the US - land of the free - conducts its foreign policy. The US armed forces need oil to function. The armed forces enforce the sale of oil in US dollars. So, the US dollar reserve currency status, global oil reserves, corporate profits and the US armed forces appear joined at the hip.

We could be forgiven for imagining a mafia-style protection racket, where oil-rich countries that don't fall into line face intimidation: 24/7 bad-mouthing, punishing sanctions, active interference and the threat of military invasion.

This reads like conspiracy, yet Empire is a self-confessed oil junkie. Policymakers that work to satisfy that addiction find any human "price is worth it", including the human cost when democratically elected leaders are replaced by 'strongmen' the way Mosaddegh was replaced by the Shah in Iran in 1953.

Venezuela, incidentally, is a democracy - and a good one! In 2012, ex-US President Jimmy Carter, founder of the Carter Center, said: "Of the 92 elections that we've monitored, I would say that the election process in Venezuela is the best in the world."

Meanwhile, today's US policymakers are quite open about wanting complete control or "full spectrum dominance". President Trump just announced the establishment of a new armed service - the US Space Force. Their job? To “ensure unfettered access to, and freedom to operate in, space … in peacetime and across the spectrum of conflict.”

In other words, Star Wars is back!

Blockchain vs Empire

Less than 250 years ago the heavily taxed North American colonies took a principled stand against the British Empire and its monopolistic, resource-grabbing East India Company. The colonists' call was for "no taxation without representation". The founding fathers were also unhappy with the British "for cutting off our Trade with all parts of the world". The irony can't be lost on American libertarians who would consider the US Declaration of Independence of 1776 to have been a good thing.

Now the United States armed forces straddle the globe collecting the same 'pound of flesh' as the British before them. Post 9/11 advisors to the President have put it bluntly: "We're an empire now, and when we act, we create our own reality".

In contrast, at the UN in February 2019, Venezuela called on all UN countries to "join us in defending international law as the only guarantor for humanity's peaceful coexistence", adding that "We all have the right to live without the threat of use of force and without application of illegal coercive unilateral measures,"

Blockchain offers an opportunity to reshape how we work together internationally. It promises to be censorship resistant, transparent, and immutable. With decentralised nodes there's even a chance blockchain will be resistant to coercion, power outages and cyber attack. It offers an alternative to SWIFT for international payments. In this respect alone, it could be truly revolutionary.

The world's first state-run public blockchain initiative - a token called El Petro - is part of Venezuela's response to an overbearing Empire. Maybe, just maybe, El Petro is one of the innovations that will allow Venezuela to emerge from its own war of independence stronger and more prosperous.

Ends | 24 Apr 2019 | Gordon Glass