December 17, 2023 - 9 min read
Commodity-backed cryptocurrencies, including cryptos backed by gold and silver, have become increasingly popular in recent years. However, oil, the world’s largest commodity by market value, has not yet been effectively tokenized– but doing so could have a major impact on the global economy and monetary system. A 2015 study estimated that all the world’s existing oil reserves were worth approximately $107 trillion, more than the 2022 global GDP of approximately $100 trillion. This is significantly more than the world’s entire supply of gold, which is currently estimated to be valued at between $10-$13 trillion, and many times more than the global value of silver, which is currently estimated to be slightly more than $1.3 trillion.
Crude oil prices, late 2013-late 2023. Source: Trading Economics.
This massive market cap and the increasing demand for oil in both developed and developing countries make oil a prime candidate for tokenization, both as a tokenized cryptocurrency backed by assets like oil futures and even as an asset that could potentially back an inflation-resistant stablecoin. Despite oil’s potential as a tokenized asset, only one project has been publicly announced: Venezuela’s controversial Petro (PTR), which is supposedly backed by the country’s oil, natural gas, and mineral reserves.
In this article, we’ll discuss the creation of Venezuela’s Petro, why it hasn’t worked, and the potential for future oil-backed tokens, cryptocurrencies, and stablecoins.
First announced by Venezuela’s President Nicholas Maduro in December 2017, the Petro was initially intended to help Venezuela circumvent the wide array of sanctions that have been levied against the country in recent years, helping the government raise new funds and potentially even reduce the country’s runaway inflation, which reached a record 65,374% in 2018. While the country’s inflation rate has fallen significantly in the last 2-3 years (to 359% in 2022), it remains one of the world’s most unstable economies, with consumer prices for basic goods increasing daily (or near-daily).
Venezuela’s inflation rate from 1985-2022. Source: International Monetary Fund (IMF).
In theory, the Petro could allow Venezuela to circumvent the traditional global banking system by allowing the government (and potentially, private citizens) to pay for international goods and services through private crypto wallets. Petro recipients could then convert the Petro to fiat currency using foreign exchanges unregulated by the U.S. government or unregulated, decentralized exchanges to convert Petros to Bitcoin or USD-backed stablecoins like USDC. Furthermore, recipients could use cryptocurrency mixers to hide their tracks and evade sanctions, even for large transactions.
The Petro (PTR) logo. Source: CoinDesk.
Despite Venezuela’s massive remaining oil reserves, estimated at almost 300 billion barrels (or more than $23 trillion at today’s prices), the Petro has remained an abject failure. It is not currently traded on any major exchanges or DEXs and has failed to raise any money for the Venezuelan government or Venezuelan companies- at least as far as we know.
But why did the Petro fail? Well, there are a variety of core reasons. The first, and perhaps the most important, is its lack of redeemability. The Petro is theoretically 100% “backed” by oil and natural resources, but as long as there is no way to redeem it for these assets, it will remain valueless.
If the Petro were directly backed 1:1 by internationally traded, 100% redeemable oil futures contracts, it would likely be able to trade at a value close to the value of those contracts; however, due to the sanctions levied on Venezuela by the U.S. and other countries, Venezuela’s oil assets are not widely traded as futures on international commodities exchanges, making redeemability nearly impossible.
The Venezuelan government initially claimed that each Petro would be backed by one barrel of oil, which would be able to be exchanged for other currencies. However, President Maduro later walked this back, saying that market forces would solely determine the crypto’s price.
While a lack of redeemability is perhaps the biggest issue with the Petro, it’s far from the only problem. Another issue that has plagued the Petro since its initial release is the choice of blockchain. While the Venezuelan government initially said that the currency would be released on the Ethereum blockchain (likely as an ERC-20 token), they changed this at the last minute to the NEM blockchain.
While there is nothing inherently wrong with NEM, launching an international sovereign currency on such a small and relatively little-known blockchain significantly reduced the potential interoperability and ease of use of the Petro. To use assets like Ethereum to purchase the Petro, users would likely first need to bridge their Ethereum (or other crypto) to the NEM blockchain, adding another relatively unnecessary step to the purchase process. To cash out their Petros, users would theoretically need to exchange their Petros for another bridged asset on the NEM blockchain and then bridge this asset back to Ethereum.
Finally, the Petro ICO was also plagued by issues. For instance, the Petro could initially only be purchased with Bitcoin, Ethereum, NEM, and Russian rubles. This excluded privacy coins like Dash and Monero, which would make ideal purchasing assets, especially since the U.S. government stated that Americans purchasing the Petro would be breaking the law by violating the U.S. sanctions against the country.
PetroDollar (XPD) price chart, 2015-late 2023. Source: CoinMarketCap.
The Petro is not the only project that has attempted to create an oil-backed digital currency. Other projects, like OilCoin, the PetroDollar, and Blur Energy, also attempted to create an oil-backed cryptocurrency, but none of these have shown much progress, partially due to a lack of institutional backing. However, the PetroDollar (XPD) is the only oil-backed crypto with a reported market cap– and its market cap is currently less than $1 million, indicating that the project has not gained widespread (or even narrow) appeal among investors.
However, these cryptos have not necessarily failed because the core concept is not marketable. More likely, they have experienced issues similar to Venezuela’s Petro, including a lack of clear redeemability, little institutional support from VCs or other investors, poor marketing and exchange listing plans, and insufficient initial liquidity.
While projects like the Petro, OilCoin, the PetroDollar, and Blur Energy have all failed, this doesn’t mean that oil-backed cryptos don’t have serious potential, and several countries are considering creating them. In January 2019, Saudi Arabia and the UAE announced a plan to explore a joint cryptocurrency, potentially backed by the nations’ combined oil assets.
In 2021, Russia also announced it would potentially create a new oil-backed cryptocurrency. While the sanctions on Russia have ramped up significantly since the country’s invasion of Ukraine in early 2022, they’re relatively minor when compared to the sanctions levied on Venezuela, particularly due to the fact many countries, including Germany, Italy, and China still depend heavily on Russian energy exports for a large proportion of their energy consumption. Russia stated that it intends to use the currency initially to trade with CIS countries (such as Belarus, Armenia, Azerbaijan, and Moldova) and would perhaps also use the currency to trade with allies facing Western sanctions, like Iran and Venezuela.
While not much has been heard about this new crypto over the last few years, if Russia were to put significant resources into creating the currency, it would have a much higher likelihood of success than the Petro and could turn into a minor regional currency that might allow the country to partially evade some of the increasingly strict sanctions levied against it.
While some consider oil-backed tokens “stablecoins,” as their price is linked to a real-world asset, there is also the possibility of creating a dollar-pegged stablecoin backed by oil and other real-world assets. In theory, this coin would remain at the price of one dollar and would be backed by assets like oil, gold, silver, and even real estate. To take this even further, the stablecoin could initially be set at a price of one dollar but could then increase alongside the rate of inflation by having the coin’s value increase at the same rate as a common inflation index, such as the U.S. Bureau of Labor Statistics (BLS) issued Consumer Price Index (CPI).
This type of inflation-resistant currency could become extremely popular, but the idea does have certain issues to address, including asset price fluctuations and redeemability. Asset-backed stablecoins generally function due to their redeemability for a real asset, such as physical gold, silver, or oil futures. If the prices of these assets fall, instead of increasing, the issuer of the stablecoin would not be able to allow holders to redeem their stablecoins for assets on a 1:1 basis. However, the idea of an inflation-resistant currency backed by a basket of real-world assets remains an interesting idea discussed by various crypto commentators.
Frax Price Index (FPI) price chart, 2022-late 2023. Source: CoinMarketCap.
It should be noted that some stablecoins, like Frax’s FPI and Volt, have already attempted to become inflation-resistant, but instead of being backed by real-world assets, these coins are backed by other cryptos and, in the case of FPI, are algorithmic stablecoins that are only partially backed by other cryptocurrencies. Stablecoins like this have met with mixed success (for example, FPI’s price has not been able to track the CPI successfully) and may become extremely volatile during periods of market turbulence.
Despite oil’s massive value as an international commodity, as of late 2023, no oil-backed cryptocurrency has successfully become a popular crypto asset. This is due to a variety of issues, including the lack of institutional backing and initial liquidity, political issues, and technical concerns, including decentralization and blockchain interoperability.
Regarding political issues, a main blocker to the widespread adoption of oil-backed cryptos may be the economic influence of the United States government, which could see oil-backed crypto as a serious threat to the dominance of the U.S. dollar.
For instance, if such a currency was to impact the dominance of the dollar as a global currency, it could have severe impacts on the U.S. economy, particularly due to America’s high level of debt, as the dominance of the dollar makes it easy for the Federal Reserve to issue new Treasuries to raise money for government budgets consistently.
In contrast, if a petroleum-backed currency were to vie with the dollar for dominance, it could seriously impact the U.S. government’s economic stability and empower oil-rich countries that are often politically at odds with the United States.
In conclusion, oil-backed cryptocurrencies may or may not become widespread in the future, though as real-world asset tokenization continues to increase, some oil-backed cryptos will likely experience a certain level of success, making it easier than ever for investors to get direct portfolio exposure to oil while experiencing crypto’s core benefits of increased financial self-sovereignty, financial privacy, and personal economic independence.
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