HomeNewsAnalysisVenezuela's New Digital Currency: Economic Gamble or Criminal Scam?

Venezuela's New Digital Currency: Economic Gamble or Criminal Scam?


Venezuela is planning to launch a new digital currency called the "petro," which officials in the South American country have billed as a way to ameliorate a dire economic situation. But experts say the petro could be used for more sinister purposes, including corruption and money laundering.

Venezuelan President Nicolás Maduro first announced plans for the petro in December 2017. It is intended to serve as an alternative to Venezuela's troubled hard currency, the bolivar, which has become so worthless that criminals are using the paper notes to counterfeit other currencies.

Last month, the Venezuelan government claimed that a pre-sale of the petro -- whose value is supposedly backed primarily by the nation's vast oil reserves -- generated significant interest from investors, allegedly raising some $5 billion in purchase offers.

However, many of the government's claims about the digital currency have been called into question, and many technical details about it remain unclear or in flux.

The opaque nature of the project has raised suspicions that the petro could be used to facilitate corruption by Venezuelan elites and to launder the proceeds of their criminal activities.

Building a 'War Chest'

Michael McCarthy, a research fellow at American University's Center for Latin American and Latino Studies, pointed out that the rollout of the petro comes against the backdrop of economic and political developments that have affected the dynamics of corruption in Venezuela.

“I view this in the broader context of the regime going through a liquidity crunch, and in addition to that liquidity crunch is the immediate context of an election, in which the government is always interested in going to its donors and asking for contributions for financing to build up a war chest,” McCarthy said.

Venezuela saw much of its access to US dollars cut off in August 2017, when the United States issued a new round of sanctions against the country. The lack of access to foreign currency has impacted Venezuela's ability to import basic goods like food and medicine, exacerbating longstanding problems with scarcities.

Shortages of essential products have been a major source of discontent for the Venezuelan public, and the Maduro administration may be looking to the petro as a potential source of a quick influx of cash that could help temporarily alleviate those problems ahead of an upcoming general election.

“This is a new scam that is meant to provide new opportunities for licit and illicit business.”

Indeed, the petro will be sold through the country's foreign exchange system, known as DICOM, suggesting the government is seeking to raise dollars, euros and other currencies that could be used to purchase imports. Morover, the government is currently offering the petro at a discounted rate that will expire on May 20, the day of the elections.

Scarcities of basic goods in Venezuela have spawned black markets involving officials and other elites. These illicit networks could be used to distribute imports purchased with the potential windfall from investment in the petro.

“This is a new scam that is meant to provide new opportunities for licit and illicit business,” McCarthy said, noting that the Maduro administration in January ended the subsidized currency exchange rate known as DIPRO, which had been used by connected elites to obtain subsidized dollars that could be sold for huge profits on the black market.

“They needed to offer regime insiders other sources of getting cash, or finding ways to make a quick buck,” McCarthy said.

Criminal Applications

Katlyn Woods, an analyst with the US Department of Homeland Security (DHS), told InSight Crime that she also believes the petro could be used for shady dealings, including money laundering.

"I feel like it's definitely geared toward more corruption and criminal activity, and there's going to be some black market for it," she said.

The DHS analyst pointed in particular to the possibility that the petro could be used for trade-based money laundering, whereby dirty money is moved around the world by manipulating the prices of imported or exported goods.

The use of a digital currency like the petro for such operations, Woods said, would add "another layer to an already layered money laundering concept," making the laundering difficult for authorities to detect.

SEE ALSO: Coverage of Money Laundering

In addition, there may be ways of "tumbling" the petro -- repeatedly trading it for other digital currencies in a way that obscures the identity of the true owner of the assets.

There are currently more than 1,500 digital currencies being sold on more than 9,000 exchanges, not all of which are regulated. Exchanging petros for other digital currencies in these markets may provide an avenue for money laundering.

However, Woods pointed out that there are significant questions about whether or not digital currency markets will actually accept the petro, particularly since the US government has warned that buying petros could be construed as offering credit to the Venezuelan government, which would violate US sanctions against the country.

Confidence Game

Perhaps the most significant obstacle to attracting sustained investment in the petro is the international reputation of Venezuela's government -- which includes defaulting on debts as well as serious accusations of corruption and violent political repression.

"I don't see people wanting to invest in Venezuela unless there is some sort of incentive there," said Woods. "The only way for them to draw people in is they have to make it attractive somehow."

One way to attract international interest, Woods suggested, would be to offer a "citizenship by investment" program, as some Caribbean countries have begun to do. The idea would be that foreign individuals could essentially purchase Venezuelan citizenship by buying a certain amount of petros.

However, no such program currently exists, and given that Venezuelan citizens are fleeing the country en masse, the promise of citizenship in the crisis-wracked nation would likely not be very enticing.

SEE ALSO: Venezuela News and Profiles

Although the petro is supposedly backed by Venezuela's natural resource reserves, potential buyers are likely to view the currency with skepticism due to a severe decline in the productivity of the oil sector.

"In a country that depends on more than 90 percent of its oil exports and whose oil output is collapsing, who really wants a petro?" Francisco Monaldi, a professor of Latin American energy policy at Rice University, wrote in a recent blog post.

The professor compared the petro to the "infamous" sucre, a virtual currency launched in 2010 that was reportedly used to facilitate various illicit schemes, including sophisticated money laundering operations.

"The petro will be just another way to carry out opaque transactions in which a few will profit at the expense of all Venezuelans," Monaldi argued.

Uncertain Future

The petro project has not fully taken shape, and the many unanswered questions about the technical details of the digital currency make it difficult to fully assess its potential criminal applications.

However, if the petro does manage to garner significant investment, the results could be problematic; it could be a windfall for the Venezuelan government, many of whose top officials have been accused of criminal activities.

"If they get a bunch of criminal buy-in, people just purchasing a ton to have some sort of value and then it shoots up like bitcoin, that could be dangerous because then you're going to have Venezuela with millions of dollars of cryptocurrency," Woods said.

Furthermore, Woods added, local authorities in Latin America often lack the training and expertise necessary to identify and disrupt shady dealings involving digital currencies.

As has been seen in the case of the US "Kingpin List," this lack of capacity can seriously hinder efforts to combat illicit financial flows -- a key concern with the petro.

"It all comes down to general lack of awareness and the training to even do anything," Woods said.

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