Venezuelan crypto scam akin to paying mortgage by winning lottery

An old English proverb says “a fool and his money are soon parted.” On Monday, the Trump administration moved to make sure no American investors were foolish enough to part with their money in a way that would help the Venezuelan dictatorship.

The new Trump executive order prohibits U.S. citizens from engaging in any transaction related to Venezuela’s newly-created digital currency, the petro, which is the first cryptocurrency launched by a sovereign nation.

{mosads}The petro is a scheme, more accurately described as a scam, by President Nicolas Maduro’s government to take advantage of the cryptocurrency craze and raise badly-needed foreign currency. Badly needed may be an understatement, because Venezuela is all but officially bankrupt.

By the end of the year, the International Monetary Fund (IMF) believes the Venezuelan economy will contract another 15 percent, meaning it will only be half the size it was five years ago. Making matters worse, oil production is crashing, thanks to catastrophic choices made by Maduro and his predecessor, Hugo Chavez.

Oil exports, on which Venezuela depends for more than 95 percent of its hard currency export revenues, are already less than half what they were when Chavez took power in 1999.

Without hard currency, Venezuela can’t import the food it needs to feed its people or the medicines used to treat their illnesses. That has triggered humanitarian and refugee crises that are the largest in the world outside the Middle East. 

If all that weren’t enough, the country is in a hyperinflationary cycle, something that is historically rare, especially when a country isn’t engaged in a war or recovering from one.

The IMF has estimated Venezuela’s inflation rate will reach 13,000 percent this year, which may also understate the crisis. Numbers from Johns Hopkins University show the inflation rate already hit 7,459 percent on March 14. In simple terms, that means prices are more than doubling every week. 

Incredibly, the chaos has even made reliable electricity a rare luxury in a country that has the world’s largest proven oil reserves, eighth-largest natural gas reserves and fourth-largest hydroelectric dam. 

All in all, the Chavez/Maduro mismanagement of the Venezuelan economy and oil industry makes their heroes, Fidel and Raul Castro, seem like financial savants. 

In their financial confusion, Venezuelan government economists decided to try an easy way out of immediate insolvency. Their plan is akin to people who think they’ll pay their mortgages by betting at roulette or buying lottery tickets. 

The thinking (if you can call it that) is that there are enough fools in the worldwide investment community who will part with billions of their dollars in exchange for the privilege of owning Venezuelan petros. 

If so, the scam would allow the Maduro government to skirt existing U.S. sanctions that make it extremely difficult to raise hard currency from abroad. 

But, as you’d expect from this gang that can’t shoot straight, the launch of the petro has been a comedy of errors. Even if they figure out how to do it, who in their right mind would trust the Venezuelan government to honor its supposed commitment to back the petro with Venezuelan oil?

The Wall Street Journal Editorial Board has referred to the petro as the “’Crypto’ Con,” arguing that “it’s baffling why anyone in the civilized world” would buy it. 

Any remotely savvy investor would also realize that purchases of petros would involve blood money: providing a financial lifeline to a corrupt, authoritarian, drug-trafficking regime, accused by Human Rights Watch of widespread human rights violations and of “systematically” using torture against its opponents. 

Despite that, Maduro has made the farcical claim that the petro has raised more than $700 million. But, as you’d expect, he’s provided no evidence that petros have brought even a penny into Venezuelan coffers. Most credible analysts believe the petros have brought next to nothing in revenues. 

In this context, the new Trump sanctions are important because they send a strong message to anyone considering buying petros. From a practical standpoint, the new sanctions may be unnecessary, because petro purchases would likely be banned by existing financial sanctions against the Venezuelan dictatorship.

Still, some financial experts believe the petro sanctions are significant, because they remove U.S. participants from the market, which removes much of the interest and potential for speculation.

However, if the objective is the return of democracy in Venezuela, the petro sanctions are just a small step. The U.S. is to be commended for its ongoing attempts to tighten the screws on Maduro and his cronies, but the mostly unilateral American efforts are unlikely to succeed.

In part, that’s because support from Russia and China has helped keep the regime afloat. But both countries seem increasingly reluctant to throw good money after bad, and U.S. allies around the world, especially the EU, need to step up the pressure. 

That pressure should be focused on dividing Maduro’s supporters in the government and the military. Those supporters have pillaged the Venezuelan treasury to the tune of hundreds of billions of dollars. Freezing those assets everywhere and shutting down access of corrupt officials to the international financial system is a first step.

That should immediately be followed by cancelling the visas of government officials and their family members and expelling those who live in the U.S. and ally nations (many family members of government officials are living luxurious lives in developed countries thanks to stolen government monies). 

Sowing discord and doing it before Maduro further cements his power in May’s presidential election is crucial.

The vote will be a sham, as Maduro will again use fraud to win, despite polls showing he is opposed by three-quarters of all Venezuelans. If that comes to pass, hopes for democracy in Venezuela will grow ever dimmer.