How the launch of oil-backed cryptocurrencies could change the market

After Venezuela, Russia is set to launch its own oil-backed cryptocurrency called Neft-Coin. But just how much of an effect could this have on the market?

Hot on the heels of Venezuela’s Petro, it’s time for Russia to launch its own oil-backed cryptocurrency. Neft-Coin is on the verge of coming to market, just as Putin set a deadline for cryptocurrency regulation to be established by the Russian State Duma.

This may be a strategic tipping point for the oil trade, a market that’s historically tied to the US dollar and that often generates rules and sanctions for geopolitical reasons.

Could oil-backed cryptocurrency adoption change the oil trade and bring more transparency to the market? It’s hard to tell since the players aiming to control these cryptocurrencies are the same as those controlling oil resources today.

What is oil-backed cryptocurrency?

So what exactly is an oil-backed cryptocurrency? An oil-backed cryptocurrency is one that is backed by the tangible asset of oil and sometimes gas reserves.

This means essentially tokenising barrels of oil held in reserve to give increased credibility and price stability to the cryptocurrency. The oil backing the currency is meant to counter volatility, which is a common characteristic of most cryptocurrencies.

It’s a niche worth trillions of dollars. Crude oil is the most exported product in the world. In 2017, crude oil shipments were worth $841.1 billion (just one year after the market collapse of 2016). The market is pretty stable right now, and that could make any oil-backed cryptocurrency a relatively stable option.

Currently, OPEC (Organization of the Petroleum Exporting Countries) state members and Russia are planning a blockchain-based cryptocurrency platform. This is meant to disrupt the current oil trade and provide exporters with more benefits.

The Petro and other oil-backed cryptocurrencies

The most famous oil-backed cryptocurrency is Venezuela’s Petro, but for all the wrong reasons. The myths and controversy around this digital coin, coupled with the unstable economy of the country, make oil-backed cryptocurrencies look like little more than an ingenious way of escaping international sanctions.

There’s zero transparency in the way Venezuela manages its assets, and no one can quantify the country’s oil reserves or say whether these tokenised barrels really exist. Moreover, it’s hard to tell how much the Petro is really worth since governmental sources provide unclear information on the subject.

Despite this, the Petro was certainly a game-changer, proving that there was a gap in the market for asset-backed cryptocurrencies. Maduro’s desperate move to free Venezuela from US control opened up the way for more credible oil-backed cryptocurrencies.

OilCoin, for example, is backed by barrels of oil and complies with existing US regulations and standards for digital currencies. Another oil-backed cryptocurrency is the PetroDollar (PDX), also operating under US laws.

In the UK, Bilur Energy is a cryptocurrency backed by energy commodities. Its value is also calculated based on the price of oil barrels.

These three oil-backed cryptocurrencies lack state support. And it’s a disadvantage that some OPEC members are willing to overcome by creating national cryptocurrencies backed by oil and gas reserves.

Some of the leading oil exporters, in fact, are looking into this option, inspired by Maduro’s vision. For example, the UAE and Saudi Arabia recently agreed on a plan for a joint cryptocurrency.

Russia embraces oil-backed cryptocurrency

Russia is not a member of the OPEC, but is still the world’s second-largest oil exporter. Russia is now getting ready to launch its own oil-backed cryptocurrency called Neft-Coin. Besides the obvious financial benefits, such a move could help the country combat US influence on the market.

The Russian oil-backed cryptocurrency would help traders avoid US sanctions, as well as improve relationships with importers that prefer trading with currencies other than USD, such as China and India.

Moreover, the Neft-Coin could be convertible into crypto-rubles and then into rubles. It would grant fewer barriers for Russian businesses, which wouldn’t have to use dollars for oil trade.

Possible consequences on the global oil market

For years, crude oil has been quoted in dollars, making a historical connection between this asset and the US currency. This led to the notion of the “petrodollar”, representing any US dollar paid to oil-exporting countries in exchange for oil.

Oil-backed cryptocurrencies could substitute the petrodollar, reducing the influence of the US in the oil trade. Digital coins could provide a way around existing financial sanctions that the US use to control the oil market and, by extension, the countries that don’t accept their global politics.

A decentralised system on the blockchain could also benefit small oil and gas companies that struggle to enter the global market. Moreover, it could lead to the appearance of secondary markets for corporate debt and equity issuance. Smaller countries could benefit more from their oil reserves and gain financial independence from the US.

However, backing the currency with physical reserves triggers risks due to price fluctuations. Oil and gas reserves are hard to quantify not just in Venezuela, but in all other countries that export oil.

Another problem that could slow down cryptocurrency adoption in oil trade comes from the cultural gaps between exporter countries. The success of each national oil-backed cryptocurrency, after all, would depend on the country’s credibility.

Last but not least, there’s the issue of blockchain security. As countries start launching national currencies backed by such essential assets to the global economy, there’s an increased risk of attacks on the crypto-based platforms that any of these countries put in place. And the consequences of this could be as dire as an oil spill.

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