Virtual Gold: Digitizing Gold On The Blockchain
The human race has an interesting relationship with gold. Mankind has loved the lustrous, soft metal since first laying eyes on it. We have quested for it and lusted after it; treasuring and trading the precious metal for thousands of years. Now, we’re digitizing it.
The U.S. dropped the gold standard in 1933, and fully decoupled the value of the dollar from gold by the mid-1970s. The last currency to stop using the gold standard was the Swiss franc on May 1st, 2000. While the world may have moved away from the gold standard, people haven’t stopped putting their trust in it, and its rarity continues to secure its value. Even though the gold standard days are gone, most large governments still hold substantial gold reserves as a precaution.
The gold standard used to work by directly tying the value of a nation’s currency to the price of gold. Since it’d be inconvenient and dangerous to always carry around actual precious metal, storing gold somewhere safe and transacting through a tokenized form, like a certificate, just made sense. That’s the basic concept of money.
Cryptocurrencies, like bitcoin, are often compared to gold in that the price of bitcoin rises and falls in a similar manner. Whenever uncertainty hits a region or particular market, fiat currency users often revert to gold as a means of securing their wealth, just as cryptocurrency enthusiasts turn to the perceived stability of bitcoin. With most virtual currencies having a reliable issuance rate and a fixed total supply, they are meant to be anti-inflationary, just like gold (since a country can’t decide to simply print more).
It seems things have come full circle and the gold standard is now being used in digital currency. There are a few companies currently offering a tokenized form of gold, hosted on the blockchain. While cryptocurrency could be considered “digital gold,” these gold-based tokens are “digitized gold” as they represent a quantifiable amount of physical metal. They’re not simply tokens backed by gold, they are tokens that represent a specific piece of gold. By using Ethereum’s ability to create custom tokens, companies are able to offer all the efficiencies that come with transacting in virtual currency, with the trust and stability offered by physical gold.
The token and the particular amount of gold it represents are one and the same. So while it’s not entirely incorrect to think about the token as a unit of value that derives its worth from the price of gold, it’s even more specific, as the token represents a particular piece of gold you own. The token acts like your record of ownership of an asset, effectively becoming the digital shadow that a real piece of gold casts into the virtual world.
Turning physical assets into digital ones is where companies like Digix Global, CodeTract, and DinarDirham have had to get creative. By purchasing gold through Digix Global, for example, you’d be creating a Digix Gold Token (DGX) that represents the specific gold bullion you bought, that will be kept safe in a special, securitized vault. If you were to buy gold through CodeTract’s Gold Token (GCT) or DinarDirham’s Dinarcoin (DNC) you would also be purchasing actual gold that’s being kept somewhere in the world.
All these gold-based token assets are secured by blockchain technology. Through a blockchain-based distributed ledger, the provenance of your gold is immutably tracked. Once you own it, it’s yours; even if the company goes bankrupt, your gold is recorded independently of their books. Keeping track of how much gold you own via the blockchain allows you to buy and sell your gold in token form, managing it with more ease, speed, and confidence than ever before.
This is why digitizing gold, and other commonly traded commodities, is a great idea. The UK’s Royal Mint has partnered with CME Group to create a digitized gold offering called Royal Mint Gold (RMG). The Royal Mint is a 1,000-year-old institution, so a digitized gold token from them should be seen as relatively trustworthy. Once the benefits of trading and investing in digitized gold become apparent, it’s possible the world could see a shift towards tracking the provenance of gold on the blockchain, if not fully digitizing gold reserves.
While gold might be a good candidate for money laundering due to its fungibility, marking and tracking specific bars can only help mitigate laundering. Sure, bad actors can still melt down stolen gold and obfuscate its origins, just not with gold tracked on a distributed ledger. As soon as that gold were moved, sold, or changed in any way, that information would be updated on the blockchain and any criminal activity could be quickly recognized.
Vaultoro is a company that facilitates the purchase, sale, and storage of gold; even without fiat currency (they currently accept bitcoin). Vaultoro also allows consumers to transact in very small amounts of gold – smaller than would normally be convenient – due to the blockchain’s ability to process micropayments.
All of the aforementioned digital gold services allow a customer to receive physical delivery of their gold if they desire, though there are often extra steps related to Know Your Customer (KYC) and Anti Money Laundering (AML) compliance that have to be taken. When actual gold changes hands, you become subject to local regulations and potentially open yourself up to taxation, depending on your jurisdiction.
Virtual currency, especially in custom token form, is quite new and therefore not entirely trusted by the general population. What better way to engender confidence in an emerging technology than to integrate one of the most trusted forms of value into it? By effectively gilding tokens, these companies are baking value into their virtual coins. With Ethereum becoming the standard for custom token creation, this process should help ease adoption and bolster the ecosystem.