Crypto is the newest form of currency, and it’s innovating every day. Gold, on the other hand, is one of the oldest known forms of currency. Yet gold still innovates in its own way, and an interesting innovation for gold we’re seeing today is it joining forces with crypto. Will this be the best of both worlds or is it just a silly gimmick?
First off, there is a lot that gold enthusiasts and crypto holders have in common. Traditional finance, especially as it seems to be imploding right before our eyes, has lost the trust of a lot of people, and it’s entirely dependent on trust. A centralized banking system is a turn off for a lot of folks, particularly those wanting to have greater financial security, and stability, in troubling times. Gold has long been a favorite hedge for those distrustful of The Fed or wary of the people pulling the strings behind our traditional finance systems. Gold has lasting value, independent of any particular banking system or government. Crypto, though not as tangible as gold does share a lot of the same benefits when it comes to decentralization. Just as nobody can dictate what you do with your physical gold, digital currency is also free from a central authority.
So perhaps this is a very natural partnership when we’re seeing gold-backed digital currencies popping up. Gold-backed crypto is also referred to as “tokenized gold”. It’s essentially a stablecoin with the value tied to the price of gold, which has been on the rise lately. Gold-backed crypto recently surpassed a $1 billion market cap.
Some governments are getting in on the crypto gold action too. Zimbabwe has announced plans for a new official cryptocurrency for the nation which will be backed by gold. This is just another step in the world moving away from the dollar, but Zimbabwe’s government is hoping this move will also help stabilize its economy, which is traditionally quite volatile. Closer to home, though, Texas is making a similar move. Lawmakers in the Lone Star State have proposed a gold-backed cryptocurrency. While there are states which accept gold and gold notes as legal currency, this bill would make Texas the first in the nation to adopt a gold-backed digital currency, if passed.
But why crypto? Surely you could have gold-backed legal tender. The US used to. Well, it turns out there are a lot of simple, modern conveniences with crypto. The technology is sound, and makes more sense than minting and carrying around physical money. In fact, a lot of fiat money exchanged today is already done digitally, but blockchain technology adds a lot of benefits. You get the convenience, speed and security of crypto with the tangible reliability of gold. After all, even the most enthusiastic gold collectors will admit that it’s not particularly practical carrying around bars of gold and trying to make fractional payments. Gold-backed tokens make this a non-issue as they work as a stand-in for the gold.
We’re still early in this development, though, with places like Zimbabwe and Texas just in the beginning phases. It’s no question that institutional adoption could lead to wider adoption of cryptocurrency overall, but the question will be whether gold-backed tokens are a match made in heaven or just a gimmick. There is still an issue of trust after all, since there is nothing forcing a cryptocurrency’s tether to gold, or ensuring there is gold to back it. This is the same problem we’re seeing with banks right now. They have plenty of money on paper, but take a look in the vaults and there’s nothing there. So who’s holding the gold that this cryptocurrency represents?
Well that’s a hard question to answer because every individual gold-backed token will have its own setup. Hopefully with governments like the State of Texas or even Zimbabwe, there would be some degree of institutional trust (and transparency), maybe even official guarantees and insurance. But that doesn’t mean every gold-backed token out there has some gold sitting in reserve ready for you to cashout. It’s possible the “gold-backed” claim for some isn’t as solid as you’d hope.
Regardless though it’s great to see cryptocurrency continuing to innovate and trying new things. Not all gold-backed tokens will necessarily succeed, but the experiments will help uncover what works and what does, and maybe gold-backed crypto is the thing to bring governments into the crypto fold, giving them some sense of tangible security on top of the ephemeral convenience of crypto.
Photo by Kanchanara and Eduardo Drapier on Unsplash.