This week, the Venezuelan government started selling the “petro,” the world’s first “national cryptocurrency.” The petro’s release is part of the Maduro regime’s strategy to combat the “financial blockade” of U.S. sanctions, yet the petro is likely to find itself just as vulnerable as other financial instruments to U.S. sanctions and market-based disincentives.
According to its petro white paper, Venezuela will create 100 million petros, but only issue 82.4 million to the public. SUPCACVEN, Venezuela’s new Superintendency of Cryptocurrencies and Related Activities, will hold the rest. The token sale will occur in phases: a private pre-sale from this week until March 19 and the initial public launch starting on March 20.
Issuing the petro will not be a major technical feat, since the token is built on the open-source NEM blockchain platform. NEM is a cryptocurrency popular in Asian markets; its platform enables users to create new cryptocurrencies with minimal coding knowledge.
The government will set the initial price of the petro according to a formula based on the price of Venezuelan oil, which the country’s oil ministry publishes. As of late January, the expected cost for one new petro was approximately $60. The government has announced that it will accept hard currency and other cryptocurrencies for the pre-sale but will not accept the bolivar, the country’s failing national currency.
As a result of U.S. sanctions, the Venezuelan cryptocurrency is likely to face hurdles in getting buyers outside of Venezuela. The regime plans to make the petro available through “electronic exchange houses (exchanges) around the world,” which likely refers to the numerous websites that allow users to buy and sell Bitcoin and other cryptocurrencies. But any cryptocurrency exchanges which intend to comply with U.S. sanctions would face particular scrutiny by listing the petro. The U.S. Treasury’s Office of Foreign Assets Control (OFAC) has already released a statement saying that the petro appeared to be the extension of credit to the Venezuelan government, which would violate the August 2017 Executive Order prohibiting U.S. persons from transacting in Venezuelan debt. Exchanges that list the petro may have to ensure that no U.S. customers purchase the cryptocurrency.
Additionally, financial institutions are unlikely to risk the repercussions of sanctions violations by supporting such exchanges involved with the petro. Major global banks in the past have cut off services to cryptocurrency exchanges, most likely due to compliance concerns.
The petro may soon be no more than a worthless digital currency created by a regime desperate to overcome its isolation and indebtedness. Maduro has claimed that after a single day of pre-sales, there has been $735 million of investment in the petro, although he provided no evidence. It is more likely that Venezuela’s corruption and turmoil, as well as the potential for the regime to exert influence on the petro’s value, will drive away buyers.
However, other kleptocratic regimes and non-state actors are likely paying close attention, hoping to find ways to transact outside the purview of sanctions. Thus, the U.S. government should set a clear precedent with the Venezuelan petro that any scheme created to evade sanctions or support illicit networks will not be tolerated. To ensure that “sanctions evasion by token offering” does not proliferate, enforcement bodies such as Treasury’s Financial Crimes Enforcement Network (FinCen) should track petro transactions once the cryptocurrency launches, analyze patterns of use, and investigate any cases that appear to fall under sanctions violations.
Yaya J. Fanusie is the director of analysis at the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance. He tweets at @signcurve. Michaela Frai is a research associate at the Foundation for Defense of Democracies. Follow her on Twitter @MichaelaFrai. Follow FDD on Twitter @FDD. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.