The volatility of Bitcoin and other major cryptocurrencies could potentially be mitigated by pegging them to precious metals, according to Thomas Coughlin, CEO of a digital currency firm set to launch such currencies in November.
Coughlin, speaking to BusinessCloud, noted that the increasing volatility of cryptocurrencies has led to the concept of a ‘stable coin’ as a viable alternative. These digital tokens are pegged to traditional fiat currencies such as the US dollar, the British pound, or the Japanese yen, with the aim of reducing volatility and increasing confidence.
However, the stability of fiat currency has recently come into question amid increasing trade wars and the rapid collapse of emerging market currencies. Consequently, there has been renewed interest in gold. Russia has been offloading US Treasury Bonds in favour of gold; Venezuela’s government has offered gold to its citizens as currency, and the Reserve Bank of India has purchased gold for the first time in nearly a decade following the collapse of the Indian Rupee.
While gold is historically one of the best stores of value, it has not been an efficient means of exchange. This is where technology comes into play. One way to address this is by creating an immutable, secure, and easily exchangeable digital record of gold ownership on the blockchain. This ownership can then be exchanged as a digital IOU for real, physical gold, similar to how original banknotes once acted as an IOU for gold, which could be given to the bearer on demand.
To ensure widespread use, it is essential for this type of cryptocurrency to be functional in place of fiat currencies. Through mobile banking technology, it can exist in an e-Wallet, functioning much like a fiat banking system. The digital currency firm plans to mint coins named KAU and KAG, representing physical gold and silver, respectively. Each gram of gold will correspond to one KAU coin, while 10 grams of silver will equal one KAG coin. Investors connected to this system will have access to a debit card usable at virtually any ATM globally.
The reluctance of crypto investors to part with their assets presents a challenge to the practicality of these digital currencies in real-world settings. Coughlin emphasised the need for these currencies to incentivise exchange to cement their place as fully functional monetary systems. This issue is similarly observed with gold and silver holders, who typically prefer to keep their precious metals rather than use them for everyday transactions.
Given cryptocurrency’s market volatility, crypto-holders often believe that their assets will appreciate in value or feel compelled to hold on to them until prices recover. To promote continuous movement within the system, a gold-based currency could incorporate a yield system that encourages exchange and equitably distributes the wealth generated according to participation and capital velocity.
As the debate around the stability of cryptocurrencies continues, the proposal of pegging digital currencies to gold presents a forward-thinking approach. By leveraging technology to create secure and exchangeable digital records of gold, this solution aims to provide a stable and practical alternative to traditional fiat and unstable cryptocurrencies.