Creating a price-stable cryptocurrency

Digitizing gold

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It has been a tumultuous time for cryptocurrency investors and advocates alike who have watched the market value of the industry drastically drop in the past year. However, some optimism is growing in the space as committed developers and blockchain advocates shun the daily obsession over price changes. The highly speculative nature of the crypto-market leads to price fluctuations, which can be very taxing on investors. To break free from this instability, industry professionals are now looking into using blockchain to create a stablecoin as an optimal digital currency that would have the following characteristics: price stability, scalability, privacy, and decentralization.

The value of gold

A useful currency should be an efficient medium of exchange, a unit of account, and a stable store of value; digital currencies excel at the first, but fail as a store of value or unit of account. A currency cannot be an effective store of value if its price fluctuates by 20 percent on an average day. This is where stablecoins come in. Stablecoins are price-stable digital currencies, meaning their market price is pegged to the value of an underlying asset, such as precious metal or fiat currency like the US dollar. By pegging their value to real-world assets, stablecoins promise price stability that can bring digital currencies into the mainstream, making the stablecoin the Holy Grail of the crypto ecosystem. However, with fiat currencies experiencing their own fair share of volatility, the historically stable nature of gold is looking increasingly attractive to investors.

In light of increasing political feuds and trade wars hitting economies around the world, gold has seen a surge of interest. Global gold purchasing in 2018 was 74 percent higher than in the year before, with central banks gold-buying hitting a half-century high. Physically, gold does not corrode nor shift in shape despite changes in temperature, location, and time. Even after thousands of years, gold remains pure and free from external elements, which allows for immediate processing, if needed. As a currency, these traits provide a sense of confidence that the value will be preserved.

This potential of innovative blockchain technology has attracted the attention of many industry experts. The institutional gold exchange, the Allocated Bullion Exchange (ABX), is leading innovation into how gold can be used as an international currency. Real, physical gold ownership is being digitized with ownership securely recorded on blockchain technology, so that physical gold and silver can be spent just as easily as fiat money, in the same way that banknotes used to be IOUs for gold. Incentivising use and adoption through a recurring income delivered via a unique yield system, which works in the same way as a bank deposit, incentivises use and prevents hoarding behaviors. This system combines new world-decentralized technology with the oldest, fairest, and most sustainable form of money, gold.

Throughout history, people have been fascinated by gold; it has been valued by civilizations across the globe and has been a significant part of the Middle Eastern culture for centuries. It holds deep economic and cultural relevance in these nations even today, maintaining its status over time as the most effective store of value. The UAE and Saudi Arabia are listed respectively as the fourth and seventh largest gold jewelry consumers in the world, according to the GFMS gold survey for 2018. The Middle East is also gradually embracing blockchain and cryptocurrencies, with Dubai setting a goal of securing all government documents on blockchain by 2020, and Iran last year announcing it is developing its own digital money.

Providing stability

By introducing a stablecoin with a 1:1 allocation to gold, a digital currency like Kinesis Money can provide the stability and liquidity required in the crypto space. Each stablecoin minted would represent a physical bar of gold/silver secured safely in vaults around the world, subject to stringent third-party audit and quality assurance processes. Not only will this assure investors of the stable value of their investments, it would also allow them to request the exact value in precious metals when physically needed. This will usher in a new era of stability to the crypto market, ensuring they are well on their way to achieving their ultimate goal—the development of a decentralized and internationally usable replacement to the current fiat-based monetary system.

Thomas Coughlin is CEO of Kinesis Money and ABX, Allocated Bullion Exchange.