The invention of cryptocurrency a decade ago has led to further innovation. The asset class, medium of exchange, and store of value has become digital gold, a cheap means of remittance and value transfer, and a hedge against inflation and equities. However, news has recently come out that a state actor, Russia, has used the idea of cryptocurrency to circumvent U.S. law sanctioning Venezuela. On March 19, U.S. President Donald Trump signed an executive order banning U.S. citizens and residents from conducting transactions with the Venezuelan cryptocurrency petro.
On March 20, TIME Magazine released an exclusive story asserting that Russia secretly helped Venezuela create the petro crypto in order to evade U.S. sanctions imposed in August 2017. Although Trump's executive order did not mention Russia explicitly, the TIME expose gave evidence that Venezuelan President Nicolas Maduro hired two advisors, Denis Druzhov and Fyodor Bogorodsky, Russian nationals with ties to the Kremlin and oligarchs. According to an anonymous Russian bank executive, Kremlin senior advisors have aided the effort, and President Vladimir Putin personally approved the project. The Russian advisors helped Maduro launch the petro, a crypto ostensibly backed by the country's petroleum reserves, on February 20. Maduro has announced that the petro initial coin offering (ICO) raised around $5 billion, and the Venezuelan government wants to launch another crypto in the future. Russian officials obviously did not respond to requests for comment.
The reason why Russia helped Venezuela create the petro is simple. Since Russia's annexation of Crimea in 2014, Russia has been suffering immensely under the effects of Western sanctions. Russia has been seeking a way to circumvent the punishment of Western sanctions, especially U.S. sanctions that make it difficult to participate in the dollar-denominated global economy. After the 2017 sanctions imposed for Venezuela's human rights abuses and government corruption, Venezuela found itself essentially shut out of the global economy. Maduro decried the restrictions to access of capital as American imperialism and called the petro America's "kryptonite." Russia and Venezuela, both motivated by a desire to escape harsh sanctions and financial penalties, found a potential answer in cryptocurrency.
The U.S. government has in recent years become more comfortable with using sanctions as foreign policy. Restricting access to the global dollar economy can be a powerful tool. But it also can lead to unintended consequences. China and Russia are preparing to trade crude oil in yuan (RMB) on the Shanghai Futures Exchange, a move that may destabilize the petrodollar. And the spectacular rise of Bitcoin (BTC) and Ethereum (ETH) in 2017 can also be a sign of de-dollarization, the global effort by some individuals and states to stop using the dollar. Even though the Federal Reserve has hiked the federal funds rate several times in the last few years, the dollar continues to weaken, and commodities continue to rise. Trump's order and Russian support of the petro are just a piece of the macro trend, and it can be seen as bearish for the dollar but bullish for crypto.
The author owns a small amount of BTC.