Venezuelan President Nicolas Maduro in December announced his plans to have Venezuela issue a commodity-backed cryptocurrency.  Although cryptocurrencies typically have no backing, there is no reason that they could not.  In such a situation, the blockchain would take over the validation function normally performed by a central bank.  Maduro’s cryptocurrency would, he says, be backed by oil, gas, diamond and gold reserves.  The opposition dismissed Maduro’s plan and called him a “clown” for even suggesting the new currency.

Not to be out-clowned, the Office of Foreign Assets Control last week issued its own FAQ on Maduro’s vague and unimplemented plan:

551. In December 2017, Venezuelan President Nicolas Maduro announced plans for the Government of Venezuela to launch a digital currency. According to public reporting, Maduro indicated that the digital currency would carry rights to receive commodities in specified quantities at a later date. Were the Venezuelan government to issue a digital currency with these characteristics, would U.S. persons be prohibited from purchasing or otherwise dealing in it under E.O. 13808?

A currency with these characteristics would appear to be an extension of credit to the Venezuelan government. Executive Order 13808 prohibits U.S. persons from extending or otherwise dealing in new debt with a maturity of greater than 30 days of the Government of Venezuela. U.S. persons that deal in the prospective Venezuelan digital currency may be exposed to U.S. sanctions risk. [1/19/2018]

Oh dear. They really said that? Seriously??

For starters, let’s address the notion that using currency issued by a government is an extension of credit to the government. Credit is extended to a government when goods or services are supplied to that government without a requirement for immediate payment. By that common and uncontroversial definition, accepting fiat money or representative money in exchange for goods and services from a private individual is not an extension of credit by the purchaser to the government that issued the currency because no goods or services were supplied by the purchaser to the government. This is even the case even if goods and services are provided to the government because the currency obtained can be immediately used for other transactions and there is no delayed payment. If the government paid with a debt instrument, such as a bond with a future maturity, then that would be an extension of credit to the government.

It appears that the genesis of OFAC’s misconception here is that the currency can be exchanged later with the government for the underlying commodity. Even were that an extension of credit to the government, OFAC’s rules would only be implicated if that exchange was delayed for more than 30 days. But, of course, the point of commodity backed currency is that it is immediately convertible. One could take the new Venezuelan currency and immediately demand to exchange it for oil, gas, gold or diamonds, so it does not have a “maturity of greater than 30 days.”

You know, you would think that the people at the Treasury, of all places, would understand how money works.

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