-Analysis-

LIMA — How does one know that a political entity qualifies as a sovereign state? This was easy in the past: an entity was sovereign if it could impose on those living in its territory payment of taxes, military service and a legal currency. After obligatory military service has disappeared in many countries, the emergence of cryptocurrencies like bitcoin is now raising doubts about the state's monopoly, or at least the formal monopoly it enjoyed, in emitting money.

Yet calling entities like bitcoin "currency" is in fact to use the word metaphorically. Cryptocurrencies do in fact perform certain functions of a currency (like serving as a form of payment), but experience suggests this is not their principal utility. Some central banks and regulatory bodies in fact refer to them as crypto-assets. They are more specifically seen as financial instruments like bonds or shares.

This is far from being an arcane debate as its conclusion will determine the way authorities will regulate these entities (I call them entities as the consensus on their existence does not extend to what on earth they actually are). For example should their owners pay taxes? If so, would they be income or capital gains taxes? Their definition would also establish the risks their use implies (like money or asset laundering or tax evasion). There is evidence for example that cryptocurrencies are habitually used (usually illegally) in so-called "wash trading," or fictitious cryptocurrency transactions intended to boost its value.

The petro is different because it's backed by a state.

Two recent developments add relevance to this discussion. One was Facebook"s new, putative cryptocurrency the Libra; the other, the Venezuelan government's version, the petro. The latter was intended to permit the Venezuelan government access to resources in a context of international sanctions and scarcity of foreign exchange. We say the petro is a cryptocurrency because that is how the Venezuelan government terms it. In fact the petro lacks two of the attributes that at one point made cryptocurrencies like bitcoin attractive to investors. One is their private nature and decentralized management. The petro is also different because it's backed by a state and its natural resources (oil, gas, gold and diamonds in Venezuela"s case).

Money and cryptocurrencies differ as the strength of national currencies or their purchasing power (of goods, services and other currencies) is thought to rest on factors like sound fiscal and monetary policies, or central bank reserves. The petro currently has none of these. As for resources like oil, they are being used as guarantees for the Venezuelan government's previous loans and existing obligations.