Digital gold-backed currency, anyone?

By Tafara Mtutu | May. 12, 2023

As it stands now, the Zimdollars has lost 99,8% since its re-introduction and its depreciation is just as unrelenting.

THE Reserve Bank of Zimbabwe (RBZ) has topped headlines with the release of gold-backed digital tokens barely a year after the Mosi-oa-Tunya coins.

According to the central bank, these tokens will be fully backed by physical gold held by the entity itself, and these tokens will be issued in phases for investment and transactional purposes.

These digital tokens will be issued in milligrammes, which is one thousandth of a gramme, through custodian banks within the Central Securities Depository (CSD) payment system and the minimum application for the tokens is set at US$10 and US$5 000 for individuals and corporations, respectively.The tokens come with a two-pronged approach, whose implicit purpose is (i) to address the shortfalls of the physical gold coin, and (ii) to pave way for a new currency whose confidence is backed by gold.

According to the central bank, the tokens will be issued in the first phase for investment purposes with a vesting period of 180 days and redeemable in the same way as the existing physical gold coins. Banks will facilitate the sale of the tokens in both foreign and local currency and they will create e-gold wallets and e-gold cards for holders of the tokens. Further, holders of the Mosi-oa-Tunya gold coins have the option of exchanging their physical coin for electronic tokens. The second phase will entail making these tokens tradeable and enabling them to facilitate transactions and settlements.

Hidden beneath the first phase is the solution to the arbitrage that was created by the physical gold coins. Theoretical arbitrage profits were speculated by analysts, where one purchased the physical coin in Zimdollars, took possession of the coin, smelted it, and sold it to Fidelity in foreign currency.

Left unresolved, the central bank would double, or even triple, count the same gold coin in its records. Issuing an e-token, on the other hand, circumvents this problem by offering a proxy for the physical gold coin that is centrally managed.

The second phase is particularly more interesting because of the possibilities it proffers. We go back in time and set the stage for our assertions.

The year is 2019 and the central bank resurrects the Zimdollars in February. This currency is backed by the confidence in the system, just like many other currencies globally.

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However, confidence is very low and, despite unrelenting efforts to garner acceptance, the US dollars remains the currency of choice for Zimbabweans.

As it stands now, the Zimdollars has lost 99,8% since its re-introduction and its depreciation is just as unrelenting. Hence, these tokens come as a theoretical replacement of the Zimdollars in the longer term. Our rationale for this long-term play by the central bank stems from its history with quasi-currencies-turned-currency in the past two decades. In May 2003, bearer cheques were issued to cotton farmers due to currency shortages and these became pervasive until they became the new Zimbabwean dollar. In 2019, the bond notes’ parity with the US dollar was officially disbanded and this created a new Zimbabwe dollar from the ruins of a quasi-currency.

We opine that the introduction of e-tokens is reminiscent of these past incidences, and we foresee the e-tokens becoming the next Zimbabwe dollar after the shortcomings of the current bond note-turned Zimdollar.

Unlike past quasi-currencies, the e-tokens will be backed by gold, and this could theoretically solve the issue of stability, if gold-backed cryptocurrencies are anything to go by.

The tokens are almost like cryptocurrency in many respects, and we look at the performance of a highly rated gold-backed cryptocurrency called Tether Gold.

The cryptocurrency has proved to be a stable asset when it comes to storing value, considering that the token has moved almost in sync with the US dollars dollar since 2021. We also add that international acceptance of the potential Zimdollar replacement will have to contend with the standing of the central bank, and we look at a very similar instrument — the Perth Mint Gold Token (PMGT) to explain.

PMGT is a gold-backed token that was rolled out by Australia’s official gold bullion mint in 2019. Each PMGT was backed by the mint’s GoldPass certificates, which were in turn backed by physical gold stored at Perth Mint.

PGMT holders could redeem their tokens for GoldPass certificates, which could be sold back to the mint or exchanged for other products.

However, four years after its launch, it has been discontinued because the Perth Mint is currently being investigated by Australia's financial crimes watchdog, AUSTRAC, over its compliance with anti-money laundering and counter-terrorism funding laws.

Before we get ahead of ourselves, we allude the reader to the current low confidence in the formal financial services system.

We opine that the uptake of gold coins has been strong mainly because the asset is tangible.

In the absence of the ability to physically hold the digital token, uptake could be limited. That said, we think demand can be sustained by the arbitrage opportunity that can exploited by buying the token in Zimdollars and selling or transacting in US dollars.

The central bank has also expressed that these tokens will not be purchased using debt funding, and we anticipate this to drive more liquidity out of the Zimbabwe Stock Exchange (ZSE) as a result, depending on the level of uptake.