The Reserve Bank of Zimbabwe (RBZ) must feel like, ‘damned if we do, damned if we don’t.’ Whatever they do attracts negativity, even when it really shouldn’t. I understand why that is though.
The RBZ has a lot to atone for and until the masses believe it has cleansed enough blood from its hands, it will be attacked for curing cancer.
The RBZ announced that it would be introducing a gold-backed digital currency. The digital gold tokens so issued will be backed by gold held by the RBZ and will be used as legal tender in Zimbabwe.
You won’t believe the vitriol they are getting for that. Well, you will believe but it’s still something to behold.
Isn’t a gold-backed digital currency something Zimbabweans would want to get behind? Let’s talk about it.
Gold coins
The RBZ introduced the Mosi-oa-Tunya gold coins in mid-2022. We applauded the idea of gold as a currency instead of the fiat Zimbabwe dollar that continues to tumble.
Trust in the Zimbabwe government determines the value of the currency it issues. Trust in the Zimbabwe government is nearly non-existent, so there is no surprise that no one trusts their dollar. Not its own citizens and certainly not the international community which won’t even accept that funny currency.
Trust in the value of gold is not dependent on the Zimbabwe govt’s actions or misactions. Not even the Gold Mafia can affect gold’s value across the planet. That shiny metal has had value for centuries and no group of thugs are going to undo that.
With that backdrop, we welcomed the gold coins.
There was one major problem though. The coin was not meant for everyday Joes and Jills like us. With a single coin costing over US$1000, it was obvious that the gold coins were to be a store of value for the fortunate, the mbingas of Zimbabwe.
We decried that fact and the recently announced gold-backed tokens are the answer we cried for then?
Digital gold tokens
The RBZ is introducing a currency that is backed by gold. Meaning if you have a note (a digital token in this case because there won’t be a physical representation) you have a claim to real gold in some vault somewhere.
For those of you who were old enough to have used the old Zimbabwe dollar you may remember that there was an inscription on the notes that said, ‘I promise to pay the bearer on demand…’ That was a relic from a time when currencies were really just IOUs, with the real money being the gold stored somewhere.
Zimbabwe is going back to that beautiful time before mere paper was money.
We are doing away with paper and saying, we will issue tokens that are essentially IOUs from the govt to the bearer. To say whoever has that token is entitled to gold in their vaults.
That all sounds good but there is a key difference between these tokens and the Mosi-oa-Tunya gold coins.
Gold coins vs digital gold tokens
The history of money tells us that those who were supposed to be safeguarding the people’s gold and ensuring that every single IOU (note) really had gold to back it up ended up giving out more notes than the gold supported.
That’s not a problem with the gold coins. There, you literally hold the gold yourself or have some other bank hold it on your behalf.
With the digital gold tokens, you don’t actually hold the gold and so you have to trust that the gold backing that token really exists.
That changes everything in my opinion. We are back to that dirty word – trust. Do I trust that the RBZ will indeed hold the gold that backs those digital gold coins? I find that I am a man of little faith. I do not possess such trust in the RBZ.
That is what may be the undoing of an otherwise good idea.
It is impractical to have tiny gold coins for values as small as US$10 and so if you are to hold $10 worth of gold, it will have to be a token. So, the RBZ is right to play it this way. Too bad a token requires some level of trust, which will be a difficult ask for many I presume.
Digital gold vs ZW$
The RBZ governor announced that they noticed that demand for foreign currency is driven not only by the need to import goods and services but also by the public viewing it as a store of value.
I’m amazed he says they ‘noticed’ this. It didn’t need noticing, it has been so in our faces as the reality, it didn’t need noticing.
Anyway, digital gold coins are supposed to be an alternative to the USD for the masses. Instead of everyone flocking to the streets to convert whatever ZW$ may fall into their pockets, they should consider getting a gold-backed digital token from their favourite central bank.
It is a hard sell but considering how getting USD on the streets is technically illegal, the digital gold should have takers.
This should lower demand for the USD and in turn, lead to the ZW$ firming up against the USD if the RBZ’s hopes come true. We shall see where the stick and the snot-apple fall.
Zimbabwe may be a tough economy to live in. What it isn’t is boring though. That may not be good for investors who crave predictability and stability but it is entertaining for the neutrals.
Do tell us what you think about the gold-backed digital tokens. Will you be deleting your forex dealer’s phone number and meeting your store of value needs using Mangudya’s tokens? Let it all out in the comments section below.
Also read:
I think I know who the gold coins are actually for and it sickens me
Zim govt looking at central bank digital currency, what is that and why won’t it fix our problems
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