Talks of a gold-backed digital currency have been circulating for years now, but one country just turned this concept into reality. The Reserve Bank of Zimbabwe officially launched Zimbabwe Gold (ZiG), a gold-backed digital token, for nationwide retail payments. On October 5, the central bank released a statement confirming that “ZiG will become one of the means of payment for domestic transactions, over and above its value-preservation purposes.”
In the same statement, the Reserve Bank of Zimbabwe confirmed that individuals can use ZiG as legal tender to purchase various goods. This mandate requires banks, enterprises, and other financial institutions to accept ZiG as digital currency using “dedicated ZiG accounts and intermediate transactions in ZiG in the same way they intermediate transactions in local and foreign currency.”
The Reserve Bank of Zimbabwe will back each digital token with gold, with the ZiG’s value matching the price of international gold. The central bank intends to inflict only half of the standard intermediated money transfer tax on ZiG transactions to make the digital currency more appealing.
“The issuance of the gold-backed digital tokens is meant to expand the value-preserving instruments available in the economy and enhance divisibility of the investments and widen their access and usage by the public,” Reserve Bank of Zimbabwe Governor John Mangudya explained in a statement.
As Zimbabwe continues to face extreme inflation levels, the central bank wanted to find a way to boost financial security and normalcy amid the economic uncertainty. For some time, citizens were turning to the U.S. dollar to store value, which is in low supply and suffers its own deterioration from inflation.
Zimbabwe’s inflation rate in September came to 18.4%, reflecting a significant drop from 2022’s average of over 100%. Despite this drop, inflation still runs rampant in the nation when compared to where it should be. For reference, the current inflation rate in the U.S. is 3.7%.
To prevent further inflation and de-dollarization within the local economy, the Reserve Bank of Zimbabwe began testing its first gold-backed digital currency in April. The concept succeeded with excellent adoption levels. Off the tail of this win, the central bank announced the launching of its first legal tender version that many would call the central bank digital currency.
“On account of their effectiveness in mopping liquidity, the GBDTs have since proved to be an effective monetary policy instrument with strong potential to help restore normalcy to the domestic financial and capital markets within the short term,” the Reserve Bank of Zimbabwe stated back in August.
A few critics have questioned the logistics of how ZiG could work in the “real world” or in other nations beyond Zimbabwe. The main concern here is whether there’s enough gold available and accessible to back a digital currency of this kind.
The Reserve Bank of Zimbabwe responded to these questions, stating that it enlisted numerous external auditors and financial services to ensure that the bank doesn’t issue anything beyond its reach. The ZiG’s availability, payouts, and payment abilities are all protected to keep residents safe.
The central bank clearly covered its bases to ensure the digital currency does not over-extend its reach. Gold is a finite resource, so Zimbabwe cannot simply issue more tokens as demand increases. This limit is exactly why a gold-backed currency can fight inflation, as its value will remain stable despite economic uncertainty.
How such a commodity could perform on a global scale remains widely unknown, as much of the world’s gold resources are already stored and being used. The concept is there, but the execution could be highly complex unless enough central banks can get on board.
Numerous central banks in Africa are already adopting the idea by exploring the possibility of a gold-backed currency within their nation. Nigeria launched the e-naira back in 2021, but its low adoption levels diminished the excitement surrounding the concept. Following Zimbabwe’s success, more African central banks seem ready to test the waters again.
Major nations, like China, continue stockpiling gold for a reason: to change the globe’s primary currency. If a gold-backed currency were to take over more nations, the precious metal would likely enjoy steady demand levels, regardless of external forces. While such an economic shift likely couldn’t occur for years or decades, even the sheer mention of it gives more attention to bullion.
Zimbabwe took a major leap that could inspire more central banks to follow through, depending on how the efforts pan out.
As always, investors should consult their financial advisors before making any portfolio moves.