Xiao Lei: The birth of the first legal digital currency may be a huge trap

The transition from sovereign credit currency to encrypted digital currency will begin in 2018. Although it is difficult for us to judge how long this transition period will take, this trend is irreversible.

Yesterday, the first encrypted digital currency launched by a sovereign state was born on Earth. Venezuela in South America began pre-selling the country's "Petro", with a total issuance of 100 million at a price of $60 per coin, corresponding to 5 billion barrels of oil, based on Ethereum ER20 token technology.

Venezuela's "Petro" is a landmark event. The transition from sovereign credit currency to encrypted digital currency based on blockchain consensus is an upgrade of society's cognition and organizational structure.

Venezuela's "Petro" has a new historical concept, but also has complex geopolitical risks.

First of all, Venezuela's "Petro" is not the electronic version of legal tender. It is backed by assets such as oil, rather than national credit. It is based on blockchain technology and has a credible consensus. Its issuance volume is no longer controlled by the Venezuelan authorities.

Secondly, from the logic of the original sovereign credit currency, its trust foundation is the mandatory nature of a government or an organization, as well as the corresponding laws. For example, the Bank of China has the "People's Bank of China Law", the Federal Reserve has the "Federal Reserve Act", etc., while the basis of encrypted digital currency is the consensus of users on blockchain, which is the concept of blockchain such as distributed accounting, decentralization, and non-tamperability. This is even more convincing than a law in the traditional sense.

The blockchain-based protocol network will replace sovereign credit and laws under the political framework and become an important basis for issuing currency in the future. It is a huge progress and change in the market economy.

Third, the "Petro" issued by Venezuela does not allow the purchase of the national currency Bolivar. Using oil reserves as the digital currency endorsement asset is, on the one hand, to achieve the purpose of obtaining US dollar foreign exchange, and on the other hand, it also sets a precedent for asset endorsement of sovereign digital currency. The need for relevant asset endorsement for sovereign states to issue digital currencies will further promote the "blockchain" of various global assets.

Fourth, Venezuela’s historic choice was not an active one, but because its currency was facing collapse and inflation was severe. It can be said that the people were living in dire straits and had to find ways to save its domestic currency and economy.

But from another perspective, there may be a major "trap" behind the "Petro". Because we don't know who is the real operator behind the issuance of the "Petro", or who proposed the entire plan to President Maduro. Venezuela is still under US sanctions, but the pre-sale of the "Petro" has attracted investment from Qatar, Turkey and other Middle Eastern countries, and more importantly, it has also attracted investment from the European Union and the United States.

This reminds me of one thing. There is a famous investment bank in the United States called Goldman Sachs. This company is amazing. Many of its clients are sovereign states. For example, there is a country called Greece. Greece did not meet the standards for joining the euro zone, but Goldman Sachs used its own strength and "cooked the books" to push Greece into the euro zone. This became an important outbreak point for the subsequent European debt crisis, dealt a heavy blow to the euro's international reserve status, and once again made the euro's strategic layout of challenging the dollar's status fail.

On the surface, Venezuela's "Petro" is a victory for blockchain digital currency and a wise move by Venezuela. But perhaps in another three to five years, the "Petro" may be a strategic plan to destroy the trust mechanism of digital currency.

At the current price of "Petrocoin", one Petrocoin corresponds to one barrel of crude oil, which is priced at about $60. The specific future trend is actually closely related to the rise and fall of crude oil prices. In my opinion, there will be a high premium in the short term, and it may even rise to more than $100. However, the problems of Petrocoin will gradually be exposed, and the probability of its eventual failure is relatively high, but this process may take several years.

Although the "Petro" is based on blockchain technology, the oil used to back it is controlled by the Venezuelan authorities. Oil is a globally strategic and scarce material. If Venezuela cannot sell its oil for dollars in reality, how can it expect to sell it after it is converted into "Petro"?

In essence, this trust mechanism ultimately comes down to the government’s own credit level, and will not change much because of the issuance of “Petro”. In fact, this is a financing activity at the national level using the hot concept of blockchain, which is the same as the purpose of most ICOs. The underwriting institutions can make a lot of money.

But the key point is not here. Although Venezuela issued the "Petro", it raised money in US dollars. The larger the trading volume of the "Petro", the higher the price, the greater the demand for US dollars. Moreover, the "Petro" has been banned from being linked to the national currency, which has led to Venezuela directly becoming a US dollar economy. It seems that a lot of US dollars were obtained at one time, but Venezuela not only failed to get rid of the US dollar with the help of the "Petro", but also increased its dependence on the US dollar. It will have no ability to resist the US sanctions.

In the future, if the "Petro" is run (a high probability event), holders will either ask the Venezuelan government to deliver oil or directly exchange it for US dollars, which will cause Venezuela to lose its foreign exchange reserves and important economic resources in a very short period of time. At that time, the authorities can only announce the suspension of exchange, and the result is to declare a default to the world, thus dealing a heavy blow to the digital currency backed by assets. This is just like the blow that the Greek debt problem brought to the euro. The global trust in sovereign digital currencies will drop to a freezing point, and the status of the US dollar will rise again.

But in any case, the global market's evolution to encrypted digital currency is unstoppable. Venezuela's "Petro" will be the beginning of encrypted digital currency encroaching on the sovereign credit currency space. In the future, when more sovereign credit currencies have problems, the only solution will be to launch encrypted digital currency naturally. Many countries with a single industry may launch encrypted digital currencies supported by their own important industries. For example (purely hypothetical) Maldives may launch "tourism currency", Brazil may launch "football currency", South Africa may launch "diamond currency", South Korea may launch "kimchi currency", etc.

Of course, this is a bottom-up subversion, starting with small countries with weak sovereign credit currencies, and finally with encrypted digital currencies competing against the US dollar, euro, etc.

One hundred years ago, during the gold standard era, the United States, as a testing ground for various new economic and financial systems in the world, experienced a very interesting phenomenon: the United States had no central bank, only banks, but the financial and monetary markets still operated, except that "bank runs" occurred more and more frequently.

In the half century before the birth of the Federal Reserve (the central bank of the United States), the United States often experienced bank runs and financial system collapses, such as financial crises caused by bank runs in 1873, 1884, 1890, 1893, and 1907. Therefore, the birth of the Federal Reserve in 1913 was also to solve the problem of the last borrower and the problem of establishing systemic rules.

With the advent of the era of encrypted digital currency, there will be more and more digital currencies of various sovereign nature, or digital currencies with certain asset nature, but no one can guarantee their credit. Take USDT, the most popular USD-anchored currency in the market, for example, which is gradually falling into major controversy.

The challenge may exist for a long time. You can regard the consensus of blockchain technology as the "constitution" in the field of digital currency, but it is difficult to effectively constrain the centralized asset controller. In other words, you can believe in the "petrocoin" based on blockchain technology, but it is difficult to effectively constrain the government and enterprises that control the oil industry.

So who will ultimately formulate the rules in digital currency and govern the performance between assets and digital currencies? I think what the United States is planning now is to have enough influence and deterrence in the future to establish a "Federal Reserve" in the field of encrypted digital currency and formulate a "United Nations Charter" in the digital currency world similar to the "Federal Reserve Act".

Therefore, investors need to seriously consider whether "Petrocoin" and other similar asset forms are progress or regression for the development of digital currency; whether it is worth celebrating or should be cautious. More importantly, the real consensus mechanism needs to reflect the currency attributes under what conditions, and can truly transform the existing dollar-dominated monetary system. This will directly affect the future trend and ultimate fate of many digital currencies, which is very important for investors.

Looking back at history, JP Morgan said in 1912 that only gold is money, and everything else is credit; if this sentence is applied to the field of digital currency a hundred years later, how should it be said?