While the cryptosphere is expanding at high speed, its basic principles need to be protected. Breaches of these should be taken as an opportunity to continue their development.
The Venezuelan model of a state cryptocurrency is both spectacular and unlikely to be a success. However, it is a welcome opportunity to start a qualified discussion on fundamental questions: Leaving fiat money aside, which are the ingredients of sustainable value?
Why the Cryptographic Movement became powerful
The 2007 and 2008 financial crisis may have pushed us to the brink of a global meltdown, but its conceptual debris grew into the seed of a flourishing industry: The crypto-economy is expanding at an unprecedented speed, startups run by often extremely young and committed people grow overnight like mushrooms from the ground, their creativity seems to be unstoppable.
The principal trigger was growing doubt about the capability of traditional protective institutions, mainly central banks, to prevent a collapse of our global economy. The new thinking aims at de-centralized processes and non-banks, enabling resilience and protection against sovereign interference.
We need not accept the equation of state intervention with errors in general terms, but this is a hypothesis that should be seriously considered. Starting with Bitcoin, we witnessed the swift development of powerful new technologies. In the beginning we saw only payment systems and may have thought that there is no need for them. Then, as the idea materialized that valuable items other than cryptocurrencies (including fiat money) may be safely stored and transferred in robust decentralized ledger systems (“colored coins”), we started to take the decentralized approach seriously.
In 10 years the crypto-space has developed in countless directions. Each of these is to be understood as a hypothesis that endeavours to assert itself in the competition of ideas.
There were spillover-effects: lots of unethical and unlawful activities. That is deplorable and yet normal in the context of a technical revolution. Just think of the dramatic early history of steam locomotives. Now there is growing consensus that e.g. the insistence on absolute anonymity was a dead-end street. It attracts users who jeopardize the legitimacy of the whole technology. Over the course of time the undesirable side effects are sweated out, and valuable new structures remain.
Legacy institutions entering the playing field
While the decentralization paradigm is winning more acceptance even beyond the crypto scene, a growing number of strictly centralized institutions are trying to jump on the cyber-train which is running on decentralized fuel. Several central states or their central banks are brooding their own cybercurrency eggs. The first egg hatched is that of the “Bolivarian Republic of Venezuela”. Evoking the country’s vast oil vast treasure, the government called it “El Petro”.
El Petro is an attempt to harness the blockchain community’s power
Following the rules of the cryptosphere, the Venezuelan government published a whitepaper . This is a truly enlightening document, in many respects. The country’s own cryptocurrency “El Petro” is described in heroic language as an anti-imperialistic project aiming at the mitigation of the country’s shortage of foreign currency, relying on ERC20 compliant Ethereum tokens.
The token sale started on 20 February, purportedly in a very successful manner. The government claims that within 20 hours it received bids in the equivalent of US$ 735 million, denominated in US$, EUR, Bitcoin and Ether. The source is the state controlled teleSUR station or the official “El Petro” website. Even the veracity of information from independent sources is not certain, for transfers may be due to fictitious transactions of friends or money can flow through channels that no one knows.
Government control also extends to the use of the system: Nationals are to get access to El Petro only via FX brokers licensed by the government. They are invited to pay taxes in Petro.
Clearly the firm control exercised by the state on the placement, the use of the new currency and the flow of information show a uniform handwriting. You can believe everything in the government or not, there is no assured knowledge.
Who will eat the cake, if any?
While 45% of the proceeds are supposed to cover the cost of development of El Petro, 55% are destined for a “state fund.” Normally Sovereign Wealth Funds are sophisticated institutions that protect and increase national wealth. The model for the El Petro scheme may be taken from an even higher sphere, from science: Even though the exact reasons for their functioning are still under discussion, astrophysicists describe rather accurately how gruesome “black holes” operate. Whatever they swallow, it’s gone forever.
Oil or code?
The Whitepaper describes El Petro as the first cryptocurrency ever which is issued by a sovereign state and backed by real assets. It points out that the national oil reserves are more substantial than those of Saudi Arabia. It criticizes cryptocurrencies based on cryptographic mining as too volatile for being value stores and defines each El Petro as having the value one barrel of Venezuelan oil in the ground.
Yes, cryptocurrencies are more volatile than crude oil, but that argument does not apply here: The whitepaper does not mention that the country is in a critical economic situation, mainly because of its ongoing inability to get sufficient quantities of its oil out of the ground. While in a normal setting the price of an underground asset is defined as its market price after deduction of the cost of extraction and there must not even the shadow of a doubt about the extraction itself, El Petro is a crude attempt to obscure this simple logic.
If the issuer of a “tangible asset-backed” investment product is unable to demonstrate whether and at which price the assets will be brought to the market, any price quote can only be hallucination or bureaucratic fiction. The reader may choose.
On the other hand, if investors naively go for such fiction, is there a way to protect them against the black hole’s traction?
What can we learn here?
The El Petro project is the exact opposite of the open and decentralized economic model which is the prevailing vision of the crypto community. It is strictly centralized, state controlled in any respect and offers no guarantee of integrity.
Yet we should not press the “delete” button in or memories too early, for El Petro is an invitation to reflect on a sensitive conceptual question:
Cross your heart! While the intellectual and technical effort put into highly sophisticated code for mining crypto currencies cannot be called into question, is that a sufficient reason to conclude that it is superior to a peg to a material asset with a market price? Is mathematical logic an absolute and always valid argument for value?
El Petro is a slightly misleading example for value derived from a peg, simply because this particular peg is extremely weak. But how would we react if the connection with the asset were well made, like in the case of a reasonably managed commodity?
We need to concede that now we are leaving the realm of strict logic and entering the realm of personal evaluations. Here factual arguments, convictions and feelings are intertwined. This blog does not provide an answer. However, we believe that a serious debate is needed to blow away the fog banks. Is it unlikely that there will soon be a consenus.
Dr. Martin Bartels, LightFin