In December 2017, the Government of Venezuela announced the adoption of a new digital currency called Petro—backed by Venezuelan oil resources—in what it described as an attempt to avoid the impact of U.S. Financial Sanctions. On January 19, OFAC published a new Frequently Asked Question (FAQ) offering its view that the proposed currency may be exposed to U.S. sanctions.
As previously reported by Crowell, on August 24, 2017, President Trump issued Executive Order (E.O.) 13808, prohibiting U.S. persons from dealing in new debt (of certain maturities), bonds (previously issued ones other than those identified by general license), and all new securities with the Government of Venezuela, and entities it owns or controls, including Petróleos de Venezuela (PDVSA) (but generally excluding CITGO Holdings Inc.).
According to OFAC, investing in the Petro could infringe these requirements.
Specifically, while OFAC offers very little insight into the structure of the Petro, the FAQ states that the new digital currency would carry rights to receive commodities in specified quantities at a later date. The new FAQ explains that a digital currency with these characteristics “would appear to be an extension of credit” to the Venezuelan Government, and therefore, U.S. persons engaging in transactions involving the Petro “may be exposed to U.S. sanctions risk.” The E.O. defines “new debt” broadly, including extension of credit. The FAQ makes no reference to the duration of any investment, but appears to assume that any investment would be for a maturity in excess of that permitted under U.S. sanctions.
Since its announcement, the Petro has been subject to controversy. The Venezuelan Government alleges that the new currency is intended to ease the deep economic recession in the country. However, commentators have expressed concern that the new Petro not only faces risks of corruption, but also is likely to have its own challenges under Venezuelan law. For instance, Article 3 of Venezuela’s Hydrocarbons Law establishes that oil reserves are part of the public domain, and as such, are not transferable. In early January, Venezuela’s Legislature rejected the issuance of the Petro, on the argument that it is illegal and unconstitutional. President Maduro, however, recently announced that the Petro is set to launch, ignoring the Legislature’s powers.
The Petro is also being closely watched by observers in Russia. Having been subject to financial sanctions that closely resemble those in force against Venezuela since July 2014, Russia recently announced it is considering following Venezuela’s steps and adopting a cryptocurrency it has also stated is intended to limit the impact of U.S. Sanctions.
Depending on how that currency is structured, OFAC’s FAQ on the Petro may give some insight into how it would view a similar effort undertaken by Russia.