What do you do when you’re the president of an oil-rich country, but your economy is so bad that your citizens form long lines to buy bread, while others are eating their own dogs due to starvation? Introduce a new cryptocurrency, of course!
This may sound like a bad joke, but that is precisely what Venezuelan President Nicolás Maduro hinted at during a five-hour long Christmas special on Venezuela’s state-run TV. Meanwhile, instead of taking responsibility for the country’s economic collapse, Maduro blamed other countries like the United States for placing sanctions on the Latin American state saying they were in a “world war”. President Maduro also added that the new Petro cryptocurrency would be backed by the nation’s oil reserves, gold, diamonds and natural gas. Hailing the Petro, Maduro explained that it would serve to “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade,”. He also added that it “will allow us to innovate towards new forms of international finance for the economic and social development of the country.”
Is it really such a bad idea?
The truth is that – in theory – a cryptocurrency that is backed by precious commodities like oil, gas and gold reserves already makes it arguably more valuable than the price-soaring Bitcoin, which is backed by absolutely nothing. The problem could be in its implementation.
Where will the electricity come from?
One issue is mining. Usually with cryptocurrencies, a process of mining takes place whereby the miners safeguard the blockchain and are then rewarded with coins. The problem with Venezuela is that mining takes up a lot of energy. In fact, Bitcoin miners today use more electricity than the entire country of Nigeria. That will be somewhat of a tall order given that most Venezuelans experience state sanctioned power cuts for four hours a day. This also means that for four hours a day, Venezuelans will be unable to buy and sell with their own national currency since they will have no electricity to begin with.
Furthermore, in order to use your cryptocurrency, you need an internet connection. And if you want to pay for something outside of your house, you need a smartphone or tablet to store your digital wallet. Most Venezuelans can barely afford a loaf of bread, let alone an internet connection or smart-phone.
These are just a few of the reasons why the Petro could fail from the outset, but there are many more. Commenting on the proposal, CNN’s cryptocurrency expert, Jose Pagliery, tweeted: ‘Watch this closely. Lots of potential for further disaster here’.
Venezuela, whose economy is in utter collapse, just announced it’s launching “Petro… a new cryptocurrency system based on oil reserves.”
Watch this closely. Lots of potential for further disaster here. pic.twitter.com/7HP1rOuSay
— Jose Pagliery (@Jose_Pagliery) December 4, 2017
Albert Einstein once said ‘“Problems cannot be solved with the same mindset that created them.” Maduro should pay close attention to this statement. That’s because the solution to Venezuela’s economic woes isn’t to introduce a new currency. And although their current currency, the bolivar, has plummeted in value, the country’s problems were not caused by the currency itself, but rather other factors that led to its astronomical hyperinflation. These include stringent government regulations and the dropping of oil prices, whose reserves were all nationalized. The bottom line is that introducing a new cryptocurrency backed by precious commodities is a great idea, but only if the country’s president first understands the principles behind basic economics.