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Cash & Working Capital / Risk Management

Not the Cryptocurrency You Are Looking For

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February 27, 2018

Companies are eager for the benefits of cryptocurrencies but maybe not the latest one from Venezuela

BlockchainThere goes the crypto currency neighborhood.

It is said that multinational firms are chomping at the bit to be able to use the backbone of bitcoin, distributed ledger, for a variety of purposes. At the same time, to add a layer of security and accountability to the concept, many countries will soon get into the act issuing central bank-backed sovereign crypto coins. But Venezuela’s recent pre-launch or pre-sale of the “petro,” a cryptocurrency backed by oil, might be one coin that companies want to avoid.

For the Venezuelan petro, investors were offered $60 tokens at discounted rates that they will be able to exchange for the currency at a so-called “initial coin offering” sometime in March. Venezuela reports that it raised about $735 million in the first day of a pre-sale.

Overall, blockchain is getting a lot of attention by corporates, as they look for better, faster and cheaper ways to move cash around the globe. Many countries already are working on these currencies, including China, Russia and Canada – even the Federal Reserve. And Estonia could be first out of the gate with a “digital token” backed by the euro. And chances are most of these government currencies will mainly be distributed ledger versions of their current coinage.

The problem with Venezuela’s new entry is that it could be anything but currency, experts say. “We think this is just a gimmick that cashes in on the current crypto craze, aims to circumvent existing sanctions, and avoids addressing the nation’s deep structural problems,” writes Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman, in a note to clients. He points out that many think it’s just debt in disguise and thus illegal according to the country’s own constitution.

“The opposition believes issuing the petro is an illegal act by Maduro,” Mr. Thin writes, and “because it appears to be a form of debt, they claim it must be approved by the legislature.” Reports also add that the US Treasury has weighed in on the petro, warning that trading in it could violate sanctions and create a legal risk for US investors. The coin “would appear to be an extension of credit to the Venezuelan government” and could “expose US persons to legal risk” if they invest in it, Treasury says.

Few US multinationals remain in Venezuela and chances are, after the various other schemes the country has launched, they’ll likely stay away from the petro. Years of currency controls and byzantine exchange rate programs – CENCOEX, SICAD I and II, SIMADI – have scared most MNCs away from the country.

About seven members of NeuGroup’s Latin American Treasurers’ Peer Group (LatAmTPG) remain in the country, mostly in “maintenance mode,” which means maintaining their presence with at minimal cost and risk. Members say they do this after conducting “maintenance mode analysis,” i.e., weighing the risk-adjusted cost of maintaining the company’s presence versus that of pulling out and reentering the market once regime change happens. Nonetheless, exit plans remain in place and constantly being reevaluated.

In the meantime, Venezuela continues moving forward with the crypto currency scheme. The country’s president, Nicolás Maduro, said recently that Venezuela is preparing another new cryptocurrency called “petro gold” that will be backed by the precious metal.

“It’s clear that Maduro and his policymakers really don’t understand what a cryptocurrency is and what it is meant to represent,” Mr. Thin writes. “If investors wanted assets backed by oil and gold, why not just buy the commodities themselves?”

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