Russia's Venezuelan Cryptocurrency Scam

Contributing to skepticism about digital currencies is the certainty that some are outright frauds. They hide behind jargon-laden “white papers” without content or webpages with dubious developers and sponsors. In terms of outright brazenness, though, the Venezuelan “petro” may be the hands down champion for a fraud masquerading as a cryptocurrency.

The “petro” has the distinction of being the world’s first country-backed digital currency. It was launched by Venezuela in February, backed by Venezuela’s oil reserves, in the hope of attracting desperately needed foreign capital and of evading US sanctions on the Venezuelan bolívar.

In April the petro was awarded the Satoshi Nakamoto Prize by the Russian Association of Cryptocurrency and Blockchain (RACIB) for its “outstanding contribution to the development of the blockchain industry”. More on this below.

From the moment of its launch, the petro has been mired in controversy. Almost immediately TIME reported that the petro was “a collaboration—a half-hidden joint venture between Venezuelan and Russian officials and businessmen...” As reported by TIME, the scheme began with Russia among the Kremlin’s most senior officials, including Putin. The principal facilitators are two Russians, Denis Druzhkov and Fyodor Bogorodsky, who are said to have close ties to Russian banks and to billionaires close to the Kremlin. Druzhkov operates a joint venture with a wealthy Russian named Sergei Litvin, who sits on the board of a Russian company controlled by Putin friend and billionaire Gennady Timchenko. The company and Timchenko are subject to US sanctions. Druzhkov was banned from the CME for three years for fraud. Bogorodsky lives in Uruguay and maintains business links to Russia and the Russian government. The use of intermediaries such as Druzhkov and Bogorodsky is a favorite ruse of Russia’s President Putin to enable the Russian government to deny involvement in activities that are illegal or harmful to other countries’ interests. The TIME article details the extent of Russia’s involvement.

Officially launched in February in a “pre-sale” and then made available to the public in March, the petro received a withering negative reception from the cryptocurrency market, many calling it a fraud and a scam. The US government included the petro under US sanctions on Venezuela to prevent its use to evade sanctions. It appears the only place one can actually exchange petro is on a Venezuelan government website. Venezuelan President Nicolas Maduro claimed, however, that Venezuela had raised US$5 billion in the pre-sale, including from Russia, China and Mexico, although he provided no evidence to support his claim. Meanwhile, in a show of no confidence in the scheme, Venezuela’s partner, Russia, will not except the petro where Russia’s self-interest is at stake, specifically payments on Venezuelan debt owed to Russia.

At the same time, Venezuela is in technical default on its conventional debt obligations—except reportedly payments to the Russian oil giant, Rosneft, run by Putin’s close friend, Igor Sechin, which remain timely. Worse, the IMF estimates that the Venezuelan economy will fall 15% this year and inflation will reach a staggering 13,000 percent. In fact, in light of the petro’s official standing and its being backed by future oil revenue from state-owned petrobas, the petro looks less like a cryptocurrency and more like a Venezuelan junk bond in disguise that is meant to bypass Venezuela’s official currency, the bolívar, because no one has faith in the bolívar’s value. Buyers of the petro--if any—would seem to be most likely Venezuelans or foreigners involved in illegal activities who cannot move their money by conventional means, such as those involved in Maduro’s other money-making scheme, Arco Minero, which allows the shady exploitation of Venezuela’s mineral resources.

Now back to the Satoshi Nakamoto Prize. Like the petro itself, the story appears to be a fake. The story first appeared in an article on April 4 on a Brazilian internet site, Criptomoedasfacil.com, written by Cassio Gusson, and then on April 16 in English on CCN.com, a kind of cryptocurrency news aggregator where Gusson is described as a contributor. The article is rich in detail, including quotes and who attended the event (Venezuelan Ambassador Carlos Rafael Faria Tortosa). The article though does not provide a source for the information. A link in the article to the Russian Association of Cryptocurrency and Blockchain (RACIB), which reportedly awarded the prize, doesn’t mention it. Gusson himself is elusive. On Criptomoedasfacil.com, Gusson is credited with nearly four hundred posts going back to August 2017, but biographical information is non-existent, lacking even a profile picture. Attempts to confirm the existence of the prize, as well as to contact Gusson, through the RACIB website, CCN, and Criptomoedasfacil went unanswered. However, Cassio Gusson’s article on the Satoshi Nakamoto prize had its effect. It has been cited across the cryptocurrency sphere, including such reputable sites as Yahoo Finance, which picked it up from CCN, lending credibility to an event that appears not to exist.

In the meantime, the Washington Post reported on May 14 that the petro is actually funded by “a little-known Moscow bank whose biggest shareholders are President Nicolas Maduro’s socialist government and two state-controlled Russian companies under U.S. sanctions…Evrofinance Mosnarbank has emerged as the only international financial institution so far willing to defy a U.S. campaign to derail the world’s first state-backed digital currency, called the petro, even before it begins to function.”
So, to summarize, the petro, which is under sanction by the US government, was set up by Russia using bankrupt Venezuela as an incubator to bypass US sanctions and propped up by a shady Russian bank, using Putin’s usual trick of nominally independent shady Russian actors—one of whom was banned in the US for three years for fraud and one of whom is under sanctions himself—as facilitators, while someone promotes the cryptocurrency using a fake prize for its innovative contribution to blockchain development. And, by the way, although President Maduro of Venezuela has declared the petro legal currency in Venezuela, the Venezuelan Congress has declared the Petro illegal and unconstitutional, and Venezuela’s National Assembly recently denounced cryptocurrency as a fraud and a threat to potential investors.

If you like cryptocurrencies because you see opportunity in risk--and you don’t care what kind of risk—you could do no better than the Venezuelan petro.