Cryptocurrencies – flying high or dead in the water?

Venezuela has launched its own cryptocurrency – the petro – but will it fly?Another week, another cryptocurrency. Venezuela’s president Nicolas Maduro is the newest convert to the crypto cause with the announcement of the country’s own digital coin, the petro. In a country that’s on its knees, few locals were able to join the celebrations – most are hard-pressed to buy food, let alone to consider the pros and cons of the latest investment opportunity.

With Venezuela’s national currency, the Bolivar, worth next-to-nothing, it’s easy to see what’s attracting its government to a new currency concept, especially one that’s linked to a state-controlled commodity like oil. The launch is a response to the social and economic problems that have left Venezuela with no chance of accessing international financing, although many will see it as a cynical move to scare up much-needed funds for the flagging administration. Maduro claims that the initial coin offering (ICO) will raise $6 billion based on the issue of 100 million oil-backed petro tokens.

It’s an idea that’s gaining traction in other struggling economies around the world. Iran’s Technology Minister Mohammed-Javad Azari Jahromi has already announced plans for its own state-backed cryptocurrency, while in neighbouring Turkey, rumours are afoot that the issue of a digital coin is being discussed by the ruling coalition parties. Brazil also appears to have its eyes on the crypto-prize, according to comments by Carlos Costa, planning chief of the country’s national development bank – BNDES – who has intimated it will press ahead with the use of blockchain technology in the near future.

Building the trust and transparency to support an ICO

There’s a gap a mile wide between announcing a coin issue and building the infrastructure to ensure it works, though. As well as blockchain, a massive investment is needed by private companies to buy the equipment and resources needed to mine the coins – money that Venezuela surely does not have.

In some ways, the idea of creating a reliable currency that isn’t dollar dependent and that would help smooth out the boom-and-bust pattern experienced by countries with unstable or inadequate banking options, is a sound one. But, it’s a process that requires trust and transparency – qualities the Venezuelan administration doesn’t appear to possess, based on its hyperinflation of the bolivar. What’s more, if Maduro lost the presidential election this spring, chances are the petro collapse, leaving investors holding the bag.

Opinion is split on the future of cryptocurrencies

Economists, investors and central banks remain split over the future of cryptocurrencies. Naysayers have variously described bitcoin as a ‘Ponzi scheme’, an ‘environmental disaster’ and ‘the mother of all bubbles’, a ‘noxious poison’. Speaking of cryptocurrencies in general, Berkshire Hathaway guru Warren Buffet has been unequivocal: ‘I can say almost with certainty that they will come to a bad end,’ he said.

Market regulators are concerned about the risk to investors, especially regarding the opportunities presented by cryptocurrencies to money launderers looking to rinse their funds, while central banks fear the threat to global financial stability – and to their own money supply monopoly, of course.

In China and Russia, the central banks have taken an unapologetically hawkish approach to cryptocurrencies. The People’s Bank of China has already closed bitcoin exchanges and supressed ICOs, while Elvira Nabiullina, the governor of Russia’s central bank has declared her opposition to the proliferation of non-fiat digital currencies, saying: ‘we don’t legalise pyramid schemes’. Not everyone is anti-crypto, though. Both the Bank of Canada and the Bank of England are investigating the opportunities afforded by a distributed-ledger system like blockchain and are downplaying the associated risks.

Crunch time for crypto?

So far, most of the discussions around the efficacy, or otherwise, of digital currencies have been hypothetical. Few products or services – excepting hackers’ ransoms – are priced in bitcoin and it’s not often used in transactions because of the prohibitive costs of doing so. As an investment, the extreme price volatility makes it super-risky for all but the most reckless of gamblers.

By every standard definition, cryptocurrencies are currencies in name only. Without the backing of a central bank, they simply don’t carry the weight they need to become a usable, tradeable asset in the same way as a fiat currency. And that’s without evaluating the environmental cost of a mining process that consumes vast amounts of energy. But, even if – as is expected – the petro fails, it’s doubtful that it will sound the death knell for cryptocurrencies, in the short term at least.

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