Source: Gold-backed digital tokens: The what, why and how of system | Sunday Mail

Tawanda Musarurwa

STARTING tomorrow, the Reserve Bank of Zimbabwe (RBZ) will issue digital tokens backed by physical gold, which can be purchased at all banks in either local or foreign currency.

Introduction of the gold-backed digital tokens is a follow-up to the launch of the Mosi-oa-Tunya gold coins last July.

The issuance of physical gold coins or digital currency by a central bank is not new.

Interestingly, the world’s most popular gold coin is neighbouring South Africa’s Krugerrand, which was first minted by the Rand Refinery and the South African Mint in 1967 to market the country’s gold.

Success of the Krugerrand set off the minting of gold bullion coins in other countries. Canada minted its gold “Maple Leaf” coins in 1979, followed by China’s one-ounce gold “Panda” in 1982, the United States’ “American Eagle” in 1986 and Australia’s “Nugget” in 1987.

On the other hand, with technological advancement and increased digitalisation of economies, digital payment systems have expanded. As a result, central banks around the world have been exploring digital currencies.

Digital currencies across the globe

In 2021, one of the world’s largest economies, China, piloted its digital Yuan or the e-Renminbi (e-RMB).

According to Central Bank Digital Currency (CBDC) Tracker, in 2023 alone, central banks of 31 countries had launched, are researching, piloting or had digital currencies at proof-of-concept stage.

Examples are Switzerland’s Helvetia (Swiss National Bank), Sweden’s e-krona (Sveriges Riksbank), Russia’s Digital Ruble (Bank of Russia), Japan’s Digital yen (Bank of Japan), India’s Digital Rupee (RBI), Israel’s e-shekel (Bank of Israel), United Kingdom’s digital pound (Bank of England) and Australia’s eAUD (Reserve Bank of Australia).

While some countries are underpinning their digital currencies on blockchain technology, Zimbabwe will be among the first countries to introduce a digital currency based on the tried-and-tested Gold Standard concept.

The RBZ’s gold-backed digital tokens are underpinned by the Gold Standard, which is a system whereby the value of a currency is fixed in terms of a specified amount of gold.

The digital tokens will broaden public access to usage of the “gold coin system”.

Individuals and institutions intending to buy the digital tokens can get the application forms from the RBZ, commercial banks, building societies and the People’s Own Savings Bank.

The offer opens on May 8 and closes on May 10, with payment to be made on May 11.

Individuals can purchase a minimum of US$10 worth of digital tokens, while the minimum for financial institutions, corporates and other entities is US$5 000.

The physical Mosi-oa-Tunya gold coins were introduced on July 25, 2022, at a price of US$1 823,80 per coin, based on the London Bullion Market Association gold price of US$1 736,95, plus 5 percent production and distribution cost at the time of their launch.

As at May 5, 2023, the Mosi-oa-Tunya selling price was US$2 146,94.

According to the RBZ, “the pricing of the gold-backed digital tokens in foreign currency shall remain the same as the pricing model of the physical gold coins as informed or guided by the international gold price, as determined by the London Bullion Market Association PM fix”.

The gold-backed digital tokens will be issued in two phases. Under phase one, investors in the digital coins will be required to hold them for six months (or 180 days) before they are redeemable.

Holders who will want to redeem the digital tokens in local currency will be paid at a 20 percent margin above the willing buyer, willing seller interbank mid-rate.

Reducing demand for US dollars

Beyond their fundamental role as an investment instrument, the digital tokens will serve to reduce demand for US dollars.
In recent weeks, there appears to be a skewed preference for US dollars for commercial transactions in the country, to the extent that some firms have been turning down payments in the local currency, which is illegal in terms of Section 7 (1) of

Statutory Instrument 185 of 2020, which reads: “Any person who provides goods or services in Zimbabwe shall display, quote or offer the price for such goods or services in both Zimbabwe dollar and foreign currency at the ruling exchange rate.”

Speculative behaviour has also seen an increase in forward exchange rate pricing, thereby driving inflationary pressures, which then push up demand for US dollars.

With the gold-backed digital tokens coming in as both an investment asset and a means of payment, this allows the RBZ to maintain the tokens’ convertibility at the fixed gold price, thereby defending the exchange rate.

Gold and effective price discovery

The Zimbabwe dollar has been seeking equilibrium since its re-introduction in June 2019, through price discovery mechanisms such as the central bank’s Dutch auction system, and more recently, through the willing buyer, willing seller interbank rate.

Although it was always highly unlikely that the parallel market would be eliminated, or for rates to perfectly converge, the gap between the auction rate and parallel rates is presently too wide. In the long run, a gold-backed currency can play a role in Zimbabwe’s international settlements, especially as countries continue to shift from use of the US dollar in international trade.

According to the World Gold Council, “Under the Gold Standard, a country’s money supply was linked to gold . . . international settlement in gold meant that the international monetary system based on the Gold Standard was self-correcting.

“Namely, a country running a balance of payments deficit would experience an outflow of gold, a reduction in money supply, a decline in the domestic price level, a rise in competitiveness and, therefore, a correction in the balance of payments deficit.

“The reverse would be true for countries with a balance of payments surplus.”

In one of the latest examples of the growing global shift towards de-dollarisation, in March this year, China and Brazil reached an agreement to trade in their own currencies.



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The what, why and how of system – Zimbabwe Situation