LEĜA In Depth #1 – May 2018
PETRO, THE “VIRTUAL CURRENCY“ OF THE VENEZUELAN GOVERNMENT
Recently, the President of the Bolivarian Republic of Venezuela adopted several measures to create a virtual currency called “PETRO”, a name derived from the oil reserves backing the Government intends to provide to that currency. This Lega In-Depth will review those measures, the PETRO features, its legal nature, its standing under Venezuelan laws and Constitution and its use.
The PETRO is created in the framework of the answer of the Venezuelan Government to the sanctions imposed by the Governments of the United States, Canada, the European Union and other countries to the Venezuelan Government, the State-owned oil company Petróleos de Venezuela S.A. (PDVSA), and a number of individuals who currently have, or have had, important positions in the Venezuelan Government and that the aforesaid Governments consider that have been involved in drug trafficking, corruption and human rights violations. In the presence of those sanctions, the Venezuelan Government announced several measures, including the establishment of a new mechanism for the provision of foreign currency, through auctions organized by the Central Bank of Venezuela, hereinafter “BCV”, and funds coming only from the private sector; as well as the intention of modifying the foreign exchange system to carry out foreign exchange operations with Euros, Yens, Renminbi, Rupees and Rubles, instead of American dollars. (In practice, the bids for the purchase and sale of foreign currency in the new foreign currency auctions system, called “DICOM”, may be made in any foreign currency, and the exchange rate is informed in Euros by the BCV. The US Dollar continues to be the most widely used currency in Venezuelan international trade and in foreign exchange transactions. None of the other currencies indicated by the Venezuelan Government are used, except the Euro, to a lesser extent).
Among the above-mentioned sanctions, those adopted as from August 25, 2017 by the President of the United States, and that apply to certain financial operations of the Venezuelan Government and PDVSA are, undoubtedly, the ones that have been more damaging to the Venezuelan Government, since those sanctions limit its access to international financing and hinder international payments of the Government and PDVSA. The PETRO is, according to government spokesmen, one of the measures to counter those financial sanctions, since it would allow the Government to make payments and other financial operations outside the American banking system.
I. REGULATORY FRAMEWORK OF THE PETRO:
A. Presidential announcement:
On December 3, 2017, the President of the Republic announced the beginning of a system of cryptocurrencies to seek for new ways of financing. According to the President, a new digital currency, called PETRO, would be issued, with the backing of gold, oil, gas and diamond reserves.
The creation of PETRO would be justified, pursuant to the President, by the need to face the “international financing blockade” that several world potencies keep against Venezuela. The Presidential announcement did not offer other details on the PETRO.
The PETRO was created by the National Executive, but no law, decree or other administrative action was published for that purpose.
B. Constituent Decree on Crypto Assets and the Sovereign Cryptocurrency PETRO:
The Constituent Decree on Crypto Assets and the Sovereign Cryptocurrency PETRO, hereinafter the “CONSTITUENT DECREE”, was published in the Official Gazette N° 6,370, Special Issue, dated April 9, 2018. It was approved by the National Constituent Assembly, a body which, pursuant to the Supreme Tribunal of Justice designated by the former National Assembly, that was controlled by the currently ruling party, has the powers to modify all laws and even the Constitution, as it deems convenient. The current National Assembly, controlled by opposition parties, considers that the National Constituent Assembly is unconstitutional because, among other reasons, it was convoked by the President of the Republic and not by the people through national referendum, as the Constitution establishes, and the mechanism for the election of its members was not a universal vote, but a vote where only certain groups could take part, ensuring that all the members of the National Constituent Assembly belonged to the ruling party. The National Assembly designated a new Supreme Tribunal of Justice, which judged null and void all the actions of the National Constituent Assembly.
The CONSTITUENT DECREE gives the broadest faculties to the President of the Republic regarding the creation, issuance, organization, functioning and use of crypto assets. The President may regulate the market and interchange of cryptocurrencies, the use of virtual wallets and the mining activities.
The CONSTITUENT DECREE defines the PETRO as a sovereign crypto asset issued and backed by the Bolivarian Republic of Venezuela, on a platform of federated blockchain (A blockchain that operates under the leadership or a group and where not everybody may participate in the process of verifying transactions), which is interchangeable for goods, services and fiat money. It establishes that the control and protection in crypto assets issues belongs to the Venezuelan Superintendence of Crypto Assets and Related Activities, hereinafter the “SUPERINTENDENCE”, which was created by Presidential Decree at the beginning of the PETRO process of creation. The SUPERINTENDENCE main functions will be to ensure normal functioning of the interchange of PETROS and other crypto assets which might be issued by Venezuela, keep the registry of miners and collect the corresponding fees.
THE CONSTITUENT DECREE also orders the National Executive to create the Treasury of Crypto Assets, hereinafter the “TREASURY”, for the issuance, custody, collection and distribution of resources. It creates a registry of virtual miners, virtual interchange houses and other entities dedicated to the savings and virtual intermediation in cryptocurrencies and crypto assets.
The CONSTITUENT DECREE provides that the State shall promote, protect and guarantee the use of cryptocurrencies as a payment means in public institutions; private and mixed companies and in joint ventures, both inside and outside the Venezuelan territory.
Finally, it authorizes the allocation of the potential development of an oilfield located in the Orinoco Oil Belt, as a guarantee for the PETRO, and ratifies the decision of the National Executive to issue one hundred million PETROS.
C. Authorization of the creation of the SUPERINTENDENCE:
Presidential Decree N° 3,196 (the “DECREE”) published in the Official Gazette N° 3,346 Special Edition, of December 8, 2017, authorizes the creation of the SUPERINTENDENCE, as a deconcentrated service without legal personality, ascribed to the Vice-presidency of the Republic.
The legal basis of the DECREE are the presidential constitutional capacity of leading the Government actions and administering the national public treasury; the provisions of the Organic Law of the Public Administration on the creation of deconcentrated services without legal personality and article 3° of Decree N° 3,074, dated September 11, 2017, which declared an State of Exception and of Economic Emergency in all the national territory, extended through Decree N° 3,157, dated November 10, 2017. That article allows the President to take the social, economic, political and legal measures he deems convenient, in accordance with the constitutional regulation of states of exception, to solve the extraordinary situation to which Decree 3,074 refers.
The purpose of the DECREE, pursuant to its article 3°, is to establish “…the purchase/sale of financial assets, the application, use and development of Blockchain technologies, mining, development of new cryptocurrencies in the country…”.
We note that article 3° of the DECREE seems to include in the purpose of the DECREE the establishment of “…the regulatory conditions established in the Venezuelan Civil Code…”, which we consider would be nonsense, since those conditions are already regulated in the Civil Code, as said article 3° recognizes, and none of the provisions of the DECREE modifies those regulatory conditions.
We understand that it is a misstatement of the DECREE and that its article 3° must be read in the sense that the DECREE shall regulate the purchase/sale of financial assets, the application, use and development of Blockchain technologies, mining, development of new cryptocurrencies in the country, under the regulatory conditions established in the Civil Code. Nevertheless, please be aware that this is only our interpretation and that it would be necessary to keep track of the provisions that regulate the functioning of the SUPERINTENDENCE, of the provisions proposed by the Blockchain Observatory (The OBSERVATORY), explained below, of the administrative practice of the SUPERINTENDENCE and of the judgments which would be issued on this matter, to be able to determine the exact reach of that provision, given that the DECREE is based in the State of Exception and of Economic Emergency and that the Venezuelan Supreme Tribunal of Justice has interpreted that under such State of Exception and Economic Emergency, the President has the broadest capacity to issue legal provisions.
D. Creation of the SUPERINTENDENCE:
Decree 3,355, published in the Official Gazette N° 6,371, Special Issue, dated April 9, 2018, hereinafter the “DECREE OF CREATION OF THE SUPERINTENDENCE”, created the SUPERINTENDENCE along the guidelines of the DECREE. We summarize its main features as follows:
1. Its main function is the coordination and control of the commercialization, circulation and holding of Venezuelan crypto assets, as well as the registry and overview of miners and exchange houses.
2. It shall issue or cancel the permits for the miners, interchange houses, virtual wallets, currencies used in the international interchange houses, and those persons that negotiate cryptocurrencies.
3. The importation, exportation and transit of electronic equipment, software, hardware, licenses, etc., for virtual mining; power generation plants and air-conditioned equipment for the mining activities, may be exonerated of the payment of taxes.
4. The SUPERINTENDENCE may impose administrative sanctions and any preemptive measures it deems appropriate.
E. Creation of the TREASURY:
Through Decree 3,353, published In the Official Gazette N° 6,371, Special Issue, dated April 9, 2018, the President of the Republic authorized the creation of the TREASURY as a company ascribed to the Vice-presidency of the Republic. The corporate purpose of the TREASURY comprises, besides the issuance, custody, collection and distribution of resources, the perception of income, transfers, payments, investments, monitoring of smart contracts and the promotion of financial equilibrium through the placement of crypto assets in the market.
F. Creation of PETRO Zones:
The President of the Republic issued Decree 3,333, published in the Official Gazette 41,366, dated March 22, 2018, creating four so-called Petro Zones, located in the Margarita Island, the Los Roques Archipelago, the Paraguaná peninsula and the area of Ureña-San Antonio, near the border with Colombia. These zones are intended to promote virtual mining and the use of crypto assets in domestic commerce. Accordingly, the PETROS may be used for the payment of goods and services, including gas. There are incentives for virtual miners and for individuals and companies that use PETROS for their commercial and industrial activities.
The importation, exportation and transit of electronic equipment, software, hardware, licenses, etc., for virtual mining; power generation plants and air-conditioned equipment for the mining activities, are exempt of taxes, including importation duties, for two years.
G. Authorization to use Crypto Assets:
Article 2°, number 6, of Decree N° 3,239, published in Official Gazette N° 6,346 Special Edition of January 9, 2018, which declares again the State of Exception and Economic Emergency (It lapses every 180 days pursuant to the Constitution), authorizes the Executive Branch to take, among other measures, the following:
“6. Take measures that permit the incorporation of crypto assets to the national economic system, starting from instruments that generate security, on the basis of the national exploitation of raw
materials, mineral resources and hydrocarbons of the Republic and their productive application in the short term to the improvement of the economic conditions of the country and the national development”.
H. Other measures taken to implement PETRO:
1. Creation of the Observatory of Crypto Assets:
On December 22, 2017 the SUPERINTENDENCE activated the web page of the Observatory of Crypto Assets, hereinafter the “OBSERVATORY”, which “…represents the institutional, political and juridical basis for the launching of the cryptocurrency in the country…”, pursuant to press statements of the Ministry of the People’s Power for University Studies, Science and Technology.
The OBSERVATORY must propose the main policies for the designs of the PETRO. The Minister did not inform the identities of the members of the OBSERVATORY but pointed out that it is a multidisciplinary team of specialists in the areas of technology, economy, finance, law, monetary issues and media. The OBSERVATORY will also carry out the monitoring of any cryptocurrency or crypto asset which might be created in Venezuela.
2. Sole Registry of Digital Miners:
This registry, hereinafter the REGISTRY OF MINERS, was open for registration of all natural or legal persons that carry out, or intend to carry out, digital mining in Venezuela.
3. Declaration of the Hydrocarbon Deposit in Field N° 1 of the Ayacucho Block of the Orinoco Oil Belt as the Basis for the PETRO:
The President of the Republic informed that this oilfield has 5,342 million of oil barrels, duly certified, with an equivalent value of 267 billion dollars.
4. White Paper:
On January 31, 2018 the Venezuelan Government published the White Paper, i.e.: the document through which the Government, as its proponent, provides the information about the PETRO to
eventual investors. This document will be identified hereinafter as the FIRST WHITE PAPER OF THE PETRO.
Pursuant to the FIRST WHITE PAPER OF THE PETRO, the PETRO will be identified with the letters “PTR” and will be “…a sovereign crypto asset backed and issued by the Bolivarian Republic of Venezuela on a blockchain platform…”. The PETRO could “…be used to acquire goods or services and will be redeemable for fiat money and other crypto assets or cryptocurrencies through digital exchange houses”. The PETRO also could “…perform the functions of digital representation of goods and/or raw materials (e-commodity) and the creation of other digital instruments for national and international trade”., as well as being an instrument for savings and investment, given its “stable value”.
The FIRST WHITE PAPER OF THE PETRO informs that only 100 million PETROS will be issued and that each PETRO can be divided in one hundred million units, each of them called “Mene” and with a value of 0.00000001 PETROS.
The launch of the PETRO will be made in two phases, a pre-Sala and an Initial Coin Offer (ICO).
The pre-sale of 38,400,000 PETROS started on February 20,2018 and would consist of the creation and sale of an ERC20 token on the blockchain Ethereum platform. The tokens that meet the requirements of the ERC20 standard are non-minable digital cards that are issued in their entirety through an intelligent contract on this platform. The token will not be part of the PETRO network until it is redeemed or “burned” during the Initial Offer process. The WHITE PAPER OF THE PETRO informs that “burning a token” means sending it to an address where it is mathematically impossible to use it again.
The reference sale price of these tokens will be USD 60 each, which was the price of an oil barrel of the Venezuelan basket offered in the second week of January of 2018. This price may change as per the market fluctuations and decreasing discounts will be applied, to stimulate early investments.
The Initial Offer of PETROS will begin on March 20, 2018 and last until the 44,000,000 PETROS intended for this Offer have been sold. eighty-two million four hundred thousand (82,400,000) units available for sale are exhausted. The sale price will be the same of the pre-sale, but during the Initial Offer four levels of decreasing discounts will be applied for every 5 million of the PETRO, and the final block of PETROS will be of 24 million PETROS. The remaining 17% of the PETRO emission will be retained by the SUPERINTENDENCE. Once finished the Initial Offer, the PETROS will be negotiable in the secondary market.
The Venezuelan State will not be able to make new emissions of PETROS without the approval of the holders of PETROS in a vote conducted through the chain of PETRO blocks on the basis of one (1) Petro equal to one (1) vote.
The FIRST WHITE PAPER OF THE PETRO assures that the Bolivarian Republic of Venezuela guarantees that it will accept PETROS as a form of payment of national taxes, fees, contributions and public services, taking as a reference the price of the barrel of the Venezuelan basket of the previous day
with a percentage discount of Dv, which would be equivalent to the current discount rate at which the State sells PETROS (Minimum discount rate: 10%). These payments will be accepted in bolivars at the exchange rate which would result from the authorized exchange houses, determined by market mechanisms, pursuant to the following formula:
Acceptance price of PETRO = Price of oil x PETRO x 1 – Dv
Bolívar PETRO Bolívar
Where the PETRO/Bolivar rate will be determined through an average weighted by the volume of operations of all exchange houses authorized by the Venezuelan Government.
In addition, the Venezuelan Government is committed to promoting the use of PETROS in the domestic market and making efforts to stimulate its acceptance throughout the world.
The FIRST WHITE PAPER OF THE PETRO contains other commitments of the Venezuelan Government, including stimulating a “…strong endogenous demand which favors the stability of the crypto-asset´s market value”, for which the Government will promote the use of PETROS by PDVSA and other public and mixed companies, as well as other national public entities, regional and local governments”. Also, the “…payment of extraordinary labor commitments and benefits in PETROS will be encouraged, provided they have the expressed individual approval of the benefitted worker”.
The accounting of PETROS as assets will be legalized, taking the market value in bolivars of the PETRO as a reference. Finally, the companies that use PETROS in their operations in Venezuela may receive tax incentives.
On March 15, 2018 another version of the White Paper was issued. We shall identify it as the SECOND WHITE PAPER OF THE PETRO. The main modification introduced by this version is the use of the NEM platform, rather than Ethereum, and therefore, the PETRO would no longer use ERC20 tokens.
II. POSITION OF THE NATIONAL ASSEMBLY:
On January 9, 2018, the National Assembly, i.e.: the Venezuelan national legislative body, approved a parliament agreement on the emission of the PETRO, through which it declared the nullity of the PETRO, based on that it violated the Constitution and the laws. The National Assembly decided to inform all potential investors and participants in the cryptocurrencies market about the fact that the PETRO is unconstitutional and illegal, as would be any other obligation of the Venezuelan State that is guaranteed by the oil reserves, or the reserves of any other mineral in Venezuelan soil.
This position of the National Assembly is based on:
A. The contradiction between the establishment of a guarantee on the oil of Field N° 1 of the Ayacucho Block of the Orinoco Oil Belt and article 112 of the Constitution, pursuant to which “The mining and hydrocarbon deposits, whichever is its nature, existing in the national territory, under the seabed of the territorial sea, in the exclusive economic zone and in the continental platform,
belong to the Republic, are goods of the public dominium and, therefore, inalienable and imprescriptible”; and,
B. The breach that the PETRO would cause to the control by the National Assembly of the public debt operations, established in article 312 of the Constitution, which provides that: “The law shall fix limits to public indebtedness in accordance with a prudent level in relation with the size of the economy, the reproductive investment and the capacity to generate income to cover the public debt service. The operations of public credit shall require, for their validity, of a special law that authorizes them, except the exceptions established in the organic law. The special law shall indicate the modalities of the operations and authorize the corresponding budgetary credits in the respective budget law. The special law of annual indebtedness shall be presented to the National Assembly jointly with the budget law. The State shall not recognize other obligations than those contracted by legitimate organs of the National Power in accordance with the law”.
III. POSITION OF THE UNITED STATES OF AMERICA:
The Office of Foreign Assets Control (OFAC) of the Treasury Department of the American Government included in its web page, in the Frequently Asked Questions in relation with the financial sanctions against the Venezuelan Government and PDVSA, an interpretation pursuant to which the PETRO seems to be a form of credit and therefore, the persons of the United States, as defined by the provisions establishing such sanctions, could not purchase PETROS.
On March 19, 2018 the President of the United States issued the Executive Order 13,827, Taking Additional Steps to Address the Situation in Venezuela, hereinafter the “EXECUTIVE ORDER”. It was issued “…in light of recent actions taken by the Maduro regime to attempt to circumvent U.S. sanctions by issuing a digital currency in a process that Venezuela’s democratically elected National Assembly has denounced as unlawful…”.
The EXECUTIVE ORDER prohibits, as of its effective date, all transactions related to, provision of financing for, and other dealings in, by a United States person or within the United States, any digital currency, digital coin, or digital token, that was issued by, for, or on behalf of the Government of Venezuela on or after January 9, 2018.
For the purposes of the EXECUTIVE ORDER, “United States person” means “…any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches of such entities), or any person within the United States”.
IV. MAIN FEATURES OF THE PETRO:
According to article 4° of the DECREE, the PETRO “…is about Venezuelan oil quoted in the OPEC basket, as well as other commodities, among them gold, diamond, coltan and gas”. Each unit of PETRO will have as physical backing a contract to purchase a barrel of oil of the Venezuelan crude basket or any other commodity that the Nation would decide.
Article 5° of the DECREE establishes that “…the holder of PETROS shall be able to make the change of the market value of the crypto asset for the equivalent in another cryptocurrency or in bolivars, at the market exchange rate published by the national exchange house of crypto assets. The holder of PETROS shall be able to make the change if the market value of the crypto asset for the equivalent in a cryptocurrency or for a fiat currency in the international exchanges.
The holder of each PETRO will have a virtual wallet, for which he/she will be solely responsible, including all the risks associated to the handling and custody of such wallet”.
PETRO dealings can take place:
A. In Venezuela, for its equivalent in another cryptocurrency or for bolivars, at the market exchange rate established and published by a national exchange house of crypto assets, an issue on which the DECREE does not offer other information.
B. Outside Venezuela, in international exchanges where the PETRO can be exchanged for its equivalent in a fiat currency at the exchange rate in force at the moment of the negotiation, or for its equivalent in another cryptocurrency.
The initial placement of PETRO will be made through an auction or by direct allocation by the SUPERINTENDENCE, in accordance with the number of oil barrels in reserves which the National Executive indicates as backing for the PETROS, and the number of PETROS put into circulation.
Pursuant to article 9° of the DECREE, the custody of the PETROS will be decentralized once the SUPERINTENDENCE carries out the Initial Offer and allocates the crypto assets to the investors.
The CONSTITUENT DECREE and other provisions issued by the Venezuelan authorities and described above, do not modify the main features of PETRO, as described herein.
V. THE PETRO UNDER VENEZUELAN LAW:
A. Legal nature of the PETRO:
1. The PETRO is a cryptocurrency?
It is not an easy task to determine the legal nature of the PETRO, partly because of the newness of the cryptocurrencies and the absence of their regulation in Venezuelan law and of any judgment on that matter. Therefore, the following comments are based on the data of the PETRO known at the moment of publication of this Lega In-Depth and may be modified as other pieces of information and documents become public.
To determine the legal nature of the PETRO, we will resort to the analysis of the DECREE, whose article 4° establishes that the PETRO “…is about Venezuelan oil quoted in the OPEC basket, as well
as other commodities, among them gold, diamond, coltan and gas”, and later that “…each unit of the PETRO will have a physical backing of a contract of purchase/sale of one (01) barrel of oil of the
Venezuelan basket of crude or any commodities which the Nation may decide”. This article must be compared with the first Whereas of the DECREE, pursuant to which the creation of a new “International Currency” is needed, and with the fourth Whereas of the same DECREE, which expresses that the PETRO is “…a crypto asset interchangeable for goods and services and for fiat money at the national and international exchange houses of crypto assets, and at the same time functions as a commodity, as it may be used as a financial refuge because it is backed by barrels of Venezuelan oil, in the form of a contract of purchase/sale with the possibility of being exchanged for physical oil”.
Also, the CONSTITUENT DECREE provides that the PETRO is a sovereign crypto asset issued and backed by the Bolivarian Republic of Venezuela, and it authorizes the allocation of the “potential development” of an oilfield in the Orinoco Oil Belt which the Government says has 5,342 million of oil barrels.
From the above quoted provisions, we understand that the PETRO aspire to be a cryptocurrency which functions as a new currency.
Now then, it is necessary to determine what a cryptocurrency is to be able to ascertain if the PETRO may be subsumed in that concept.
The Royal Spanish Academy, which is the official institution responsible for overseeing the Spanish language, does not provide a definition of “cryptocurrency”. That word has been defined by the Oxford and Cambridge dictionaries in the following manner, respectively:
“A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”.
“A digital currency produced by a public network, rather than any government, that uses cryptography to make sure payments are sent and received safely”.
A web page specialized in these issues, called Coindesk (www.coindesk.com) defines cryptocurrency as “A form of currency based solely on mathematics. Instead of the fiat money, which is printed, a cryptocurrency is produced through the resolution of mathematical problems based on cryptography”.
The Merriam-Webster dictionary defines “cryptocurrency” as “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions”.
And finally, Wikipedia defines it as “…a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are a type of digital currencies, alternative currencies and virtual currencies. Cryptocurrencies use decentralized control as opposed to centralized electronic
money and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger”.
Based on the aforesaid, we may conclude that the main features of a cryptocurrency are:
a. Its exclusive foundation on cryptography, since they are created through the resolution of mathematical problems based on the “…art of writing with a secret code o in a enigmatic way”, as per the definition provided by the Royal Spanish Academy; and,
b. Its independence of any government or central bank.
On the contrary the PETRO, although it is generated through the Blockchain technology, is not based exclusively on it, but it is affirmed that “…it is about Venezuelan oil quoted in the OPEC basket, as well as other commodities, among them the gold, diamond, coltan and gas…”, so that its value, as expressed by the Venezuelan President, is equivalent to the value of an oil barrel of hydrocarbon deposits located in Venezuela.
In addition, regarding the independence from governments or central banks, the PETRO clearly will depend on the decisions of the Venezuelan Government, since it will be issued by the Venezuelan State, mined solely by it, oversaw by the SUPERINTENDENCE, backed by a guarantee granted by the Venezuelan State through its ownership of the hydrocarbon deposit we mentioned above and, finally, regulated by the DECREE and the CONSTITUENT DECREE, which are based in the declaration of a State of Exception and Economic Emergency in the first case and in the alleged supraconstitutional powers of the National Constituent Assembly.
Based on the aforesaid, we conclude that the PETRO is not a cryptocurrency.
2. The PETRO as a security or as another kind of operation intended to obtain funds, in both cases with a guarantee:
Once ruled out that the PETRO would be a cryptocurrency, we must try to determine what it is, so that we note:
a. It is evident that the PETRO is issued by the Venezuelan State, who issued the DECREE and the CONSTITUENT DECREE, established the REGISTRY OF MINERS, created the SUPERINTENDENCE and
the TREASURY, and declared that the guarantee would the hydrocarbon deposit of the Block N° 1 of the Ayacucho Field, in the Orinoco Oil Belt.
b. It is also evident that the issuance of the PETRO creates an obligation of the Venezuelan State, to the extent that it issues an instrument that it intends to be used as a means of payment, as if it were money, the value of which it guarantees when the DECREE provides that the PETRO expresses a value equivalent to that of a barrel of Venezuelan oil quoted in the OPEC basket and that the Venezuelan State will collect funds from the sales of PETROS, either in bolivars or in foreign currencies.
c. Given those features of the PETRO, we must analyze the Organic Law of Financial Administration of the Public Sector, hereinafter the LAW OF FINANCIAL ADMINISTRATION (Official Gazette N° 6,210 Special Edition OF December 30, 2015), which regulates, among other issues, the public credit in Venezuela. Article 6° of the LAW OF FINANCIAL ADMINISTRATION defines the public debt as “the indebtedness resulting from the public credit operations” and the public credit operations as”…the capacity of the entities regulated by this Decree with Rank, Value and Force of Law, to get into debt”. The Republic is one of the entities regulated by that law.
d. Article 80 of the LAW OF FINANCIAL ADMINISTRATION lists the public credit operations, including the issuance and placement of securities, la opening of credits of any kind, the granting of guarantees and any other operation intended to obtain resources which imply reimbursable financing.
i. The PETRO as a security:
Therefore, we must determine if the PETRO may be subsumed in the cases of public credit listed in article 80 of the LAW OF FINANCIAL ADMINISTRATION, and if it may be subsumed, if its creation should have been approved by the National Assembly.
i.i. For that purpose, we note that, since the PETRO is issued and guaranteed by the Venezuelan State, it may be subsumed in numerals 1, 4 and 6 of article 80 of the LAW OF FINANCIAL ADMINISTRACION, in the following manner:
“Article 80. There are public credit operations:
1. The issuance and placement of securities, including Treasury bills, which constitute borrowing or treasury operations, except those intended for tax reimbursement.
4. The granting of guarantees.
6. Any other operations intended to obtain resources which imply reimbursable financing”.
i.ii. The issuance of the PETRO can be considered an issuance of securities inasmuch as the PETRO represents rights which have been incorporated to it and their exercise is conditioned by the possession of the PETRO. Certainly, it would be a dematerialized security, so far as it does not have a physical, written document which embodies it. On the other hand, even among the dematerialized securities, it would be an improper security, given the way it would be transmitted, different to the
nowadays known for the circulation of dematerialized securities, pursuant to Venezuelan law on the securities market.
It is to be noted that in the PETRO it is assumed that its possession will allow the exercise of the rights it embodies. The PETRO will grant to its holder the right to demand from the contractual counterpart the compliance with the obligations which have been agreed using the PETRO, as well as the right to demand the guarantee that the State has created over an oilfield. Besides, the PETRO
is intended to circulate, i.e.: to transmit the rights it embodies from a person to another, with the characteristic of the securities, that each acquirer of a PETRO acquires a right of its own, different from the right that had or could have the person from whom he/she acquired the PETRO.
Therefore, in our opinion the PETRO may be considered a form of dematerialized security, whose characteristics differ from those of traditional securities but, with the necessary adjustments derived from its condition of electronic asset, shares the main elements of the above-mentioned securities.
ii. The PETRO as other operation intended to obtain resources:
As we have indicated, the PETRO is intended to obtain resources in foreign currency through its negotiation in the “international exchanges” mentioned by the DECREE and the CONSTITUENT DECREE, and those resources will be used for treasury operations, given the effects on the Venezuelan Treasury operations and foreign currency holdings, of the financial sanctions imposed on the Venezuelan Government and PDVSA by the United States.
Under these circumstances, the PETRO can be subsumed in number 6 of article 80 of the LAW OF FINANCIAL ADMINISTRATION, copied above, if the specificities of its condition of electronic asset hinder its consideration as a security. In this sense, we consider that the PETRO complies with the requisites of number 6 of article 80 of that Law, i.e.: that there are operations which are not specifically included between the other operations listed therein, and that there are operations by which it is intended the obtainment of resources that imply a reimbursable financing.
iii. The PETRO as an operation guaranteed by the Venezuelan State:
Irrespective of the fact that it would be considered a security or another operation intended to obtain resources, the truth is that in both cases the PETRO would be a liability guaranteed by the Venezuelan State as per the DECREE, which provides in its article 4° that the PETRO: “is about Venezuelan oil quoted in the OPEC basket, as well as other commodities, among them gold, diamond, coltan and gas.
Each unit of the PETRO will have a physical backing of a contract of purchase/sale of one (01) barrel of oil of the Venezuelan basket of crude or any commodities which the Nation may decide”.
On the basis of the preceding analysis, we conclude that the issuance and commercialization of the PETRO are operations of public credit, be it considered a security or an operation intended to obtain resources that imply reimbursable financing, pursuant to numbers 1 and 6 of article 80 of the LAW OF FINANCIAL ADMINISTRATION, and in both cases, because they are liabilities guaranteed in accordance with number 4 of that article.
B. Constitutionality and legality of the PETRO:
Once determined the legal nature of the PETRO, we must analyze if it conforms to the Constitution and laws in force in Venezuela. We note in this regard:
1. Unconstitutionality of the creation of the PETRO by the President of the Republic instead of by the BCV:
Article 318 of the Constitution establishes that the bolivar is the Venezuelan monetary unit and that the monetary powers of the National Power shall be exercised in an exclusive and mandatory manner by the BCV. We note that the BCV has not been involved in the DECREE or the CONSTITUENT DECREE, or any other provision governing the PETRO, which would contribute to the consideration of either the nullity of the PETRO or to the conclusion of the PETRO as something else than a cryptocurrency.
2. Unconstitutionality of any guarantee over a hydrocarbon deposit:
We point out that there are two interpretations on this issue. The first one states that since there is an State of Exception and Economic Emergency in place which, pursuant to the Constitutional
Chamber of the Supreme Tribunal of Justice, grants to the President of the Republic very wide powers to take any measure that he deems convenient, so long as such measures do not violate the fundamental rights that Chamber has determined; and the second maintains the illegitimacy of the Supreme Tribunal of Justice, including its Constitutional Chamber, because of the irregularities committed at the designation of its members back in December 2016, i.e.: before the deputies, mostly of opposition parties, elected on December 2015, took their seats. Pursuant to the first interpretation, the whole PETRO scheme, including its guarantee over oilfields, would be fully constitutional, given that they were measures deem convenient by the President. According to the second interpretation, the State of Exception and Economic Emergence requires the approval of the National Assembly, and since it has rejected repeatedly said State of Exception and Economic Emergency, same is null and void, and all the measures that the President of the Republic takes must abide by the Constitution currently in force.
Article 12 of the Constitution establishes:
“Article 12. The mining and hydrocarbons deposits, whichever its nature, existing in the national territory, under the seabed of the territorial sea, in the exclusive economic zone and in the continental platform, belong to the Republic, are goods of the public dominion and, therefore, inalienable and imprescriptible. The marine coasts are goods of the public dominion”.
The inalienability of the mining and hydrocarbons deposits means that they are out of commerce, and therefore, they cannot be alienated by any title, and consequently, they cannot be given in guarantee, since a guarantee implies the possibility of compulsory enforcement.
Therefore, in our opinion, any guarantee of the PETRO based in the DECREE and the CONSTITUENT DECREE, and implemented through the allocation of a hydrocarbon deposit for this purpose, would violate article 12 of the Constitution.
3. Illegality of any guarantee over a hydrocarbon deposit:
Article 3 of the Organic Law on Hydrocarbons (Official Gazette N° 38,443 of May 24, 2006), establishes:
“Article 3. The hydrocarbon deposits existing in the national territory, whichever its nature, including those located under the seabed of the territorial sea, in the continental platform, in the exclusive economic zone and within the national borders, belong to the Republic and are goods of the public dominion, therefore inalienable and imprescriptible”.
This article, undoubtedly inspired by the above-mentioned article 12 of the Constitution, reiterates the inalienability of oil deposits, so that the arguments and conclusions exposed under V.B.2 above, are applicable to this issue.
4. Illegality of the creation of the PETRO, because it violates exclusive powers of the BCV:
Article 107 of the BCV Law establishes that the exclusive right to issue banknotes and to mint coins, that are legal tender, in all the territory of the Republic, belongs to the BCV. No institution, public or private, whichever its nature, will have the power to issue monetary species”.
Therefore, if the PETRO were to be a cryptocurrency, the exclusive power of the BCV would have been violated by the creation of the PETRO, which would render it null and void.
5. Inexistence of the guarantee of the PETRO:
We note that, although the DECREE and the CONSTITUENT DECREE mention an oil guarantee for the PETRO, and the President of the Republic declared that an oilfield located in the Orinoco Oil Belt would be the guarantee of the PETRO, that guarantee has not been legally created under Venezuelan law. The only provisions in force in relation with the PETRO guarantee are the following:
a. The DECREE establishes that each unit of PETRO would have a physical backing of a contract for the purchase/sale of one barrel of oil;
b. The CONSTITUENT DECREE declares that the PETRO is backed by the Bolivarian Republic of Venezuela and authorizes the allocation of the “potential development” of the abovementioned oilfield to function as the backing of the creation and issuance of PETROS; and,
c. Decree 3,292, published in the Official Gazette N° 41,347 of February 23, 2018, which determines as the backing of operations of financial and commercial interchange through crypto assets, the “potential development” of the abovementioned oilfield.
None of those provisions improve the situation of the creditor (Holder of PETROS) vis a vis the debtor (The Bolivarian Republic of Venezuela), in the event of a compulsory enforcement of the offer of an oil guarantee contained in the DECREE, the CONSTITUENT GUARANTEE and the FIRST and SECOND WHITE PAPER OF THE PETRO. The mere allocation of a good for a certain purpose is not a guarantee and does not improve the possibilities of the obtainment by the creditor of the payment of its credit.
6. Difficulties for the compulsory enforcement of the guarantee:
In addition to the abovementioned inexistence of the guarantee, we note that, in the event that the PETRO guarantee would be considered as existent, the compulsory enforcement of such guarantee over an oil deposit has other difficulties. For instance, such guarantee is physically in the subsoil of a certain part of the Venezuelan territory, the exploitation of which corresponds exclusively to the debtor (Bolivarian Republic of Venezuela, as Issuer of the PETRO), who can sovereignly decide when and to which extent will exploit that deposit, as well as the use of the oil obtained from that deposit. We note that the WHITE PAPER OF THE PETRO, in its first and second versions, compares this guarantee with those of the cryptocurrencies DIGIX and TETHER, ignoring that in both cases the corresponding guarantee (Gold in the case of DIGIX, foreign currency in the case of TETHER), is physically deposited in vaults of the London Bullion Market Association (LBMA) and in banking accounts in foreign currency in the case of TETHER.
Additionally, although the DECREE establishes “Each unit of the PETRO will have a physical backing of a contract of purchase/sale of one (01) barrel of oil of the Venezuelan basket of crude or any commodities which the Nation may decide”, the CONSTITUENT DECREE and the other provisions mentioned in N° I above do not contain any reference to that contract of purchase / sale of oil or other commodity.
7. Creation process of the PETRO:
Considering that the issuance and placement of PETROS are public credit operations, as we have indicated, we are of the opinion that the National Executive should have obtained the approval of the National Assembly pursuant to article 187:6 of the Constitution, which establishes that said Assembly must “Discuss and approve the national budget and all bills concerning the tax regime and the public credit”.
In the same sense, article 82 of the FINANCIAL ADMINISTRATION LAW regulates the presentation by the National Executive, to the National Assembly, of the “…bill of the Special Law on Annual Indebtedness, which will establish the maximum amount of the credit public operations that are to be carried out during the respective economic-financial exercise by the Republic, the maximum amount of net indebtedness that it may get during that exercise, as well as the maximum amount of Treasury bills which may be circulating at the end of the respective exercise…”.
Now then, in the creation process of the PETRO this procedure has not been followed. Instead, the President of the Republic decided to issue the DECREE, based, as indicated above, in the State of Exception and Economic Emergency and lately, on the CONSTITUENT DECREE.
For the reasons expressed above, we consider that the issuance of PETROS should have abided strictly to the constitutional and legal provisions we have commented on.
C. Commentaries on the use of the PETRO for the payment of obligations:
The FIRST and the SECOND WHITE PAPER OF THE PETRO affirm that “The Bolivarian Republic of Venezuela guarantees that it will accept Petro’s as a form of payment of national taxes, fees, contributions and public services…”. In the same way, it expresses that “…The use of Petro will be promoted by PDVSA and other public and joint ventures, as well as national public entities and regional and local governments”. It also says that “The payment of extraordinary labor commitments and benefits in Petro will be encouraged, as well as accumulated social benefits, provided they have the expressed individual approval of the benefitted worker”. The Venezuelan Government offered to legalize the accounting of PETROS as assets and that the companies that sell goods or render services in Venezuela may get tax incentives if they use PETROS in their commercial transactions.
In this regard we observe:
1. The general provisions regarding payment of obligations are established in the Civil Code and the BCV Law. According to article 1,290 of the Civil Code the creditor may not be forced to receive something other than what is owed to it, even if the value of the thing offered is equal to or even greater than that of the thing owed to it. Therefore, no creditor in bolivars or in foreign currency can be forced to receive PETROS instead of the bolivars or the agreed foreign currency.
2. As indicated above, the exclusive right to issue legal tender belongs to the BCV and no other institution, public or private, can issue monetary species. Therefore, the PETRO is not legal tender and nobody can be forced to accept it as a means of payment.
3. Article 91 of the Constitution provides that the salary “…shall be periodically and timely paid in legal tender…”. This provision is ratified by article 123 of the Organic Law on Labor, Male Workers and Female Workers (Ley Orgánica del Trabajo, los Trabajadores y las Trabajadoras), which provides that “the salary must be paid in legal tender” and that “the payment in merchandises, coupons,
chips or any other representative sign, with which the money is intended to be replaced, shall not be allowed”.
These provisions are obstacles to the use of the PETRO for the payment of extraordinary labor commitments and benefits, as well as accumulated social benefits.
4. We consider that pursuant to currently in force Venezuelan law, the PETRO is not legal tender and therefore, nobody may be forced to use it in its commercial or financial activities. Neither the DECREE or the CONSTITUENT DECREE establish any obligation to use the PETRO. It is only an alternative means to pay debts, if the creditor accepts to be paid in PETROS.
Based on the aforesaid, we conclude:
A. The PETRO is not a cryptocurrency, but a kind of dematerialized public debt of the Bolivarian Republic of Venezuela, which issued it and claims to guarantee it with the potential development of an oilfield located in the Orinoco Oil Belt.
B. There are several arguments questioning the constitutional and legal aspects of the PETRO, based on:
1. The PETRO was created by the President of the Republic, exercising the faculties granted to him because of a State of Exception and Economic Emergency. Additionally, the CONSTITUENT DECREE was issued by the National Constituent Assembly, which was not convoked by a popular referendum, as the Constitution establishes. The current National Assembly and the Supreme Tribunal of Justice designated by it, currently in exile, have declared the unconstitutionality and illegality of the PETRO.
2. The CONSTITUENT DECREE establishes that the PETRO is guaranteed by the Republic, and the DECREE provides that such guarantee shall be created on an oilfield. Such guarantee would be clearly contrary to the Constitution, which prohibits creating any guarantee on oilfields located in Venezuelan territory.
3. We note that, actually, the guarantee has not been created. The Venezuelan Government has only allocated the “potential development” of an oilfield as the basis for the PETRO guarantee, but such allocation does not create a guarantee, nor it improves the possibilities of the creditor (The investor in PETROS) to obtain from its debtor (The Republic), the payment of its credit. We point out that any “potential development” of the oilfield designated as the basis of the guarantee, depends solely on the sovereign decision of the Republic, i.e.: the debtor, who would also decide sovereignly on the use of any financial resources obtained from the exploitation of that oilfield.
4. The President of the United States issued an Executive Order imposing sanctions to the commercialization of the PETRO. Those sanctions impede “persons of the United States” acquiring
or dealing on PETROS. We suggest individuals and companies to verify if those sanctions would apply to them.
5. The Venezuelan Government has taken several measures to ensure the PETRO has an ample domestic market. Those measures include the designation of several areas of the country as “PETRO Zones”, the announcement of tax incentives for whoever uses PETROS in its commercial or industrial activities and allowing public entities to receive payments of fees in PETROS.
6. The PETRO is not legal tender in Venezuela. The CONSTITUENT DECREE did not modify the position of the Bolivar as the only legal tender in Venezuela, and therefore, the only payment means that must be accepted by creditors. Constitutionally, the Venezuelan Government cannot impose the acceptance of PETROS for payments. Their acceptance would always depend on the will of both the debtor and the creditor.