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Blockchain and Gold, A Match Made in Heaven.

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Human fascination with gold is as old as recorded history. Flakes of gold can be found in caves dating back to 40,000 B.C.[1] Earlier on in society, “our ancestors were faced with coming up with a currency or a medium of exchange that was better and more efficient than the barter system.”[2] The idea of a gold coin was the logical choice to them.

Gold has been valuable and used in society for several thousands of years, but is now only considered a store of value. How can gold become a useful medium of exchange again as opposed to just being a store of value in today’s society?

This post explores how blockchain technology can answer the above question and make the use of gold mainstream again.

Characteristics Of Money

Money can be anything that can serve three functions: (1) a store of value, (2) a unit of account and (3) a medium of exchange. To put it in simpler terms, money is something that “holds its value over time, can be easily translated into prices, and is widely accepted.”[3]

Why Gold Is Not Considered Money/Not Used As A Currency

Gold easily serves the first function of money, but it lacks in the second and third one. To be considered a unit of account, “the various denominations of a currency should be recognizable and distinguishable from each other at sight.”[4] Gold fails this category.

Many people do not know the various denominations of gold on sight, such as how much an ounce of gold or a gram of gold is on sight. Gold also is typically inversely related to how the economy is doing and so possibly stamping the value of gold on its face would not be practical. We would have to re-stamp the value each time the price of gold fluctuates.

Gold is also not a good medium of exchange. To be considered a good medium of exchange, “money has to represent many grades of value.” For instance, in the U.S. we have payments ranging in value “from at least one cent to one hundred thousand dollars.

By the combination of different elements of the medium, it should be possible to represent the exact value of any and every commodity without difficult calculations.” Gold fails at this macro level. A denomination of less than one dollar in gold is not possible. Gold is also very heavy and inconvenient in transactions involving hundreds of thousands of dollars.

Gold is also not considered a currency because of the actions of U.S. President Nixon in the 1970s. According to Nixon, “the free circulation of gold coins is unnecessary,” and insisted that “the transfer of gold is essential only for the payment of international trade balances.”[5] Nixon also made it a crime to hoard gold and imposed either a fine or jail time for doing so.

Lastly, he announced that the US would “no longer convert dollars to gold” at a fixed price, which signaled the complete abandonment of the gold standard, and the start of a national currency that was issued by the central government.

Tokenizing Gold

a. How Does Tokenizing Gold Work?

Tokenization is a method that converts a right to an asset into a digital token.[6] The token is then issued on a platform supporting smart contracts, such as Ethereum so that the tokens can be bought and sold on different exchanges. Buying a digital token of gold represents the physical backing/underlying asset (i.e.: gold) of the token.

Once you buy the token, it is recorded on the blockchain, which ensures ownership since the Blockchain is immutable. Nobody can erase or take away you’re ownership once you purchase a token.

b. Requirements Of Any Company Trying To Tokenize Gold

Tokenizing gold requires several certifications to prove the underlying asset is safe and secure. There are three current requirements to establish proof of asset: (1) a Vendor, (2) a Custodian Vault and (3) an Auditor.[7] A Vendor is a public and/or private company that sells gold bullion; a Custodian vault is a place where the company can store gold, and an auditor is a respected auditing company that inspects and confirms possession of all the gold the said company has. (sample audit of DGX below)

c. Benefits In Tokenizing Gold

“Applying blockchain technology to enable the frictionless exchange of title to gold is the single most significant innovation in monetary technology since the advent of standardized coinage in the first millennium BC.” Roy Sebag [8]

Owning physical gold comes with many issues. These issues include safekeeping/storage, issues with ensuring bullion/gold coins, and more.

The solution to many of these inherent problems is by creating a crypto asset that is backed by physical gold. By having a respected and trusted entity back each token with a certain weight in gold, investors would feel much more safe in investing and holding gold. (Would have a lot fewer worries with issues mentioned above)

In addition, though this may be on a much higher level than this post was meant to address, the value of paper gold certificates far “exceeds the value of real gold in existence.”

It is commonly argued that the price of gold is “manipulated, as increased physical demand was merely offset by an enormous expansion of paper gold on the supply side.”[9] If a blockchain could actually ensure that every ounce of physical gold “could be held only once or only by a defined number of people, this would significantly reduce the ability of market participants to produce excess paper gold.”

Another benefit in the combination of gold and blockchain technology is that it will make it easier to integrate gold into today’s payment system. There are very limited ways to use gold as a means of exchange today.

This synthesis will likely expand the typical store of value option gold provides. For instance, a crypto debit card would allow gold investors to use their tokenized gold to transact with retailers/merchants worldwide. In addition, many Millennials today tend to live a “digital lifestyle and do not even consider gold as an investment because of its physical properties.” Providing a digital way of holding and spending gold will open the gold world to a wide variety of new participants.

d. Why Gold Is A Good Alternative to State-Controlled Paper Currencies

Merging Cryptocurrencies and gold creates another alternative to state-controlled paper currencies. Many state-controlled paper currencies tend to suffer from wild inflation rates.

A good example of this is the Venezuelan Bolivar, which has suffered from hyperinflation. Venezuela’s currency has suffered from inflation by almost 2 million percent. [10] Buying anything in the country, in the off chance something is available, is virtually impossible. At towns along the Colombian border, “food and medicine are bought with dollars or pesos. The Bolivar has simply lost any kind of value.”

Iran is another country that is experiencing high inflation rates. Iran is experiencing an annual “inflation rate of 42.3 percent.” The Country’s economic woes are largely the result of oil sanctions initiated by President Trump.

The Country has since turned to precious metals, such as gold, as a solution to these sanctions. Iran is now experiencing a “surge in gold mining activity in the wake of the second rollout of US sanctions,” and has signed several memoranda of understanding with private groups to develop new gold and copper miners.[11] Iran is also said to have created its own gold-backed cryptocurrency called “Paymon,” as a means to bypass these sanctions by Trump.

“The cryptocurrency would back and tokenize Iran’s national fiat currency, the rial, in order to facilitate domestic and cross-border transactions.” Id. This would go far in revitalizing the Country because the U.S. cannot sanction crypto transactions as it does with fiat transactions.

Recap

Gold has long been looked to as a stable investment and a place to hedge against a potential economic collapse and/or a way to avoid inflation(note: most fiat currencies fail).

Many do not know the benefits in transacting in gold compared to transacting in other currencies, such as USD. This introductory post introduces some benefits in tokenizing gold, such as providing a custodian service to hold your gold and providing you a token to use to represent such a holding instead of using its physical form to transact, as well as providing a way to avoid massive inflation rates many countries suffer from.

Gold has long been held in huge storage facilities, such as Fort Knox, with no available use to them. We can now transact with this stored gold by tokenizing the possession of such. While this symbiosis may go far, there is still much to do, such as establishing a legal framework for potential token holders. While it is still early, I am optimistic in the future of blockchain tech and its union with gold.

Igor Davidov
Fascinated with all things crypto-related since finding out about it mid 2017. Was entering my second year of law school at the time, but found my passion for crypto only growing as I found out more about it. I am now working full time in the space as a analyst and a writer after having obtained a law degree.

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