Can a gold-backed crypto currency be a viable alternative to central bank issued fiat money?

 

For people to consider the possibility of a gold backed crypto currency (GBC), we first have to look at the technical argument. The obvious questions will be asked like; does their gold really exist? Will it maintain its purchasing power? Is it secure? What can I buy with my GBC? What’s the point of it?

But I think the most important issue will be down to the user experience and the practical day to day use for the consumer. It needs to be totally seamless. GBC is the base currency but how can I can it be used for day to day payments as if its a normal bank account.

So, the first question is what makes GBC a sensible choice as a base currency.

In 2008 we came perilously close to the ATM’s not working. The current monopoly on the issuance of currency by central banks and governments combined with a leveraged banking system is a dangerous cocktail which could completely collapse in the space of a few days.

Yes, we do have an £85,000 government guarantee of our bank accounts in case of a banking collapse under the financial services compensation scheme. Which gives some comfort. But post 2008, there is a deep distrust on how the financial system works, and who it is really working for.

A lot of this distrust led to the creation of bitcoin and the community that has built up around it. It makes sense that we have forms of money that are not government controlled. Having alternatives alternative forms of money and banking will also lead to a more robust and sustainable financial system.

Bitcoin is a currency with no counterparty as is gold, people around the world with the right technical know how can mine bitcoin as people can mine gold – the value of bitcoin and gold is determined by what you can exchange it for unlike with fiat money where the reputation and stability of the government and banks that stand behind their currency can have a big impact on the value of their money. Venezuela and Zimbabwe are extreme examples of this.
Gold has been used as a form of money since the beginning of civilisation and arguably has maintained its relative value or purchasing value from Caesar’s Rome to the modern age.

I think its difficult to argue against the idea of having a gold backed currency as an option for consumers to choose for themselves, especially at a time where the financial system is still arguably recovering from the last collapse.

The big question is, can customers use a gold backed currency for day to day purchases.

Clearly it is not going to be the case that GBC might be accepted by merchants overnight in the same way that we can’t spend bitcoin that easily.

But the improving availability of current accounts and debit cards, through api’s, that can be linked to an underlying GBC account, could make the transferability between GBC and GBP(£) through a linked debit card or current account, nearly unnoticeable from an operational, frictional and cost perspective.

With this in mind, we can build a regular banking infrastructure on top of and alongside a base GBC wallet. The customer can use pounds as easily as GBC.

This gives the consumer the choice to switch between a pound based system and a gold backed currency system, with the obvious acceptance advantages of pounds combined with the lower counterparty risk and long term price stability of gold.

About the Author

Ralph HazellRalph is CEO of The Real Asset Company, and was previously a trader and market maker in the fixed income and commodity markets for over 10 years. He was a founding partner of Trafalgar Financial Futures in Gibraltar, and of Jebel Tariq Trading in Dubai, which was the first company to automate market making in gold futures on the DGCX Dubai Gold and Commodities exchange. He is passionate about gold’s vital role within the financial system, and has been investing in gold since 2000. He set up The Real Asset Company as a service he would choose himself.View all posts by Ralph Hazell