28.02.2020Read Time: 7 min

Towards a Global Currency With Gold-Backed Crypto

Central banks are exploring the feasibility of launching digital currencies

Share article:

  • telegram icon
  • twitter icon
  • reddit icon
  • linkedin icon

Across many lands, central banks are exploring or studying the feasibility of launching central bank digital currencies (CBDCs). It has dawned on many experts in the field of central banking that the blockchain and cryptocurrencies are inevitable innovations.

Privately issued Bitcoin has already demonstrated that digital currencies or cryptocurrencies have a place in today's financial and payments markets, and unless they reform, central banks risk being driven out. It, therefore, seems logical for central banks to join in this mad rush to create digital alternatives to fiat money, such as gold-backed crypto.

CBDCs Gaining Momentum

While the momentum towards digital currencies grows, questions are being raised now about how CBDCs will be deployed, their design, or if these will ever be interoperable with privately issued digital currencies.

However, there seem to be some pressing issues that need tackling before CBDCs overtake fiat cash that seems not to be getting enough attention. Questions on what will determine the value of CBDCs issued by central banks need to be answered well before any talk of rolling out the digital tokens.

For CBDCs to work smoothly and be interoperable, there has to be a common denominator or basis that allows any such seamless movement of funds between different networks. In addition, using a common base eliminates the uncertainty and chaos that presently besets the private currency space.

Some influential figures have suggested using existing public blockchain networks like Stellar or Ethereum as a rail on which CBDCs will run.

This approach eliminates the need to start everything from scratch, and the authenticity of various CBDCs will not be questioned since they will all be running on a well-known blockchain.

Central Bank Opposition to Using Crypto

Indeed this approach seems plausible, yet it is doubtful this will see the light of the day. Central banks have long exhibited a deep dislike of privately issued cryptocurrencies and their underlying technology. Therefore they are about to countenance the idea of using a fintech created by private individuals to support their CBDCs. So there is some validity in their opposition to commercially oriented tech companies becoming currency issuers.

For example, as it stands now, no privately created blockchains can support a transaction throughput needed for them to offer a viable alternative, and that is one legitimate reason why central banks might not like this idea. Of course, different projects have ongoing work to address this scaling challenge, although it is unclear when this will be achieved. However, it seems opposition to tech companies may have a lot to do with other issues besides failure to scale. Many within the central banking circles believe and are adamant that currency issuing is their preserve and no one else has that right. 

Recent comments attributed to FrançoisVilleroy de Galhau, the governor of the Banque de France, are the latest attempt to re-emphasize this point. Villeroy de Galhau claimed in January 2020 that ‘currency cannot be private, money is a public good of sovereignty.’

So given this apparent friction between central banks and tech companies venturing into the currency-issuing space, it is understandable why the former can't adopt a privately created blockchain.

Gold-Backed CBDC: Is It a Good Alternative?

The general idea when creating CBDCs is to attain uniformity and common standards. This helps to pre-empt chaos. Since central banks might not be comfortable using privately built blockchain, the next best option would be to use a valuable commodity to create or establish the value of CBDCs.

Such a commodity can help to stabilize the value of one unit of a CBDC that a central bank wholly creates. Such backing instills confidence in the currency.

When a valuable commodity such as gold is used to back CBDCs, potential users will have confidence in that currency irrespective of the technology or design used in creating the token. Few will question or doubt the value of one unit of any such digital currency.

In addition, backing a cryptocurrency (or any currency for that matter) with gold eliminates the volatility challenge that presently besets privately or publicly issued coins.

Gold has a track record and a history of maintaining its value in real terms. Therefore, interoperability between different digital currencies will be enhanced if this precious metal backs all.

Nevertheless, central banks may take longer to achieve this (a genuine golden token) as they are considered laggards in space. This is well noted by the Official Monetary and Financial Institutions Forum (OMFIF) in a report released in late 2019.

In that report, OMFIF encourages central banks to outsource some aspects of their CBDCs from private tech companies. Part of the report reads:

“Practically, the operation of a CBDC is likely to rely on some sort of public-private partnership. For example, central banks could outsource the distribution of the CBDC to private financial institutions, which could also be involved in the on-boarding of users.”

For all their expertise in monetary policy, there are some capabilities that central banks do not possess and have no desire to cultivate.

Input From Private Sectors On Creating A CBDC

So while this part of the report specifically mentions financial institutions, tech companies can also help create a CBDC that meets the demands of users.

Indeed some tech companies specialize in tokenizing precious metals (or any other valuable commodity) as a service. For example, tech company Aurus offers a blockchain-based tokenization solution primarily to the gold industry. 

Aurus has created a gold standard token, the AurusGOLD, a digital asset that mimics the value of one gram of gold on behalf of certain gold industry players. This token is expected to act as a gold-backed cryptocurrency that can be redeemed for gold anytime the holder wishes.

In this instance, the tech company does not own the gold standard token. Still, it merely provides a software protocol to or towards the gold industry without having involvement in the tokens or gold reserves. Players in this industry are the ones who own the commodity and thus are the issuers of the token.

A similar service can be extended to central banks that may want to back their respective CBDCs with precious minerals such as gold, platinum, rhodium, etc. Such asset-backed CBDCs could mark a giant step towards a universal currency system that commerce has been yearning for.

End Of The US Dollar Dominance

In theory, a gold-backed CBDC issued by a central bank in Malawi must be readily acceptable in Mexico (and vice versa) because both are backed by a precious metal that has the same attributes regardless of where it is stored.

A CBDC backed by gold has the potential to overcome obstacles encountered by companies that are involved in cross-border trading. The US dollar currently acts as the de facto global or universal currency, but it has limitations just like all other fiat currencies.

Such limitations and challenges are what prompt companies and governments to seek alternatives. For example, the Chinese government announced towards the end of 2019 that it was in the process of creating and launching its own CBDC. Many people expect this CBDC to chip away some of the US dollar's global appeal, a long-term goal of Beijing.

Similarly, a group comprising of the UK, Japan, and others is reported to be studying the best approach to creating CBDCs. Again when these countries eventually launch their respective CBDCs, the US dollar will lose further ground.

However, only a gold-backed crypto can finally usurp the US dollar's global appeal. A gold standard cryptocurrency is even better because it comes with both the revolutionary attributes of the blockchain and those of gold.

Therefore, it stands to reason that countries and their central banks should go the gold-backed digital currency route if they launch a CBDC. Undoubtedly, the issuance of gold standard tokens would lay the infrastructure needed to establish a universal currency.

Aurus links: WebsiteTwitterTelegramNewsletterYoutubeEmail


Recommended articles