Zimbabwe’s central bank has recently announced the launch of a gold-backed digital currency, aiming to provide investors with a platform to save, invest, and transact in gold. The Reserve Bank of Zimbabwe (RBZ) confirmed that fractionalization will allow individuals to acquire digital gold tokens for as little as US$10. These tokens, set to be issued this week, will be available for use in payments. The RBZ received a significant response, with 135 applications valued at 14 billion Zimbabwe dollars ($12 million) submitted for purchasing the gold-backed digital tokens. A second auction is scheduled for May 18, 2023.
The Purpose of Gold-Backed Digital Tokens.
Zimbabwe’s central bank intends to expand the range of value-preserving instruments available in the economy and enhance the divisibility, access, and usage of investment instruments by the public. The offer to purchase digital tokens backed by physical gold is open to individuals, financial institutions, corporates, and other entities. By introducing the gold-backed digital currency, Zimbabwe aims to stabilize its tumbling currency, provide an alternative to the US dollar, and combat currency depreciation and exchange rate volatility.
Advantages of Gold-Backed Digital Tokens.
One significant advantage of the gold-backed digital tokens is the accessibility they offer. Unlike physical gold coins, which are sold for over US$2,000, individuals can acquire fractions of digital gold tokens for just US$10, making them more affordable. This affordability is made possible through fractionalization, which enables assets to be accessible to a wider range of people who were previously unable to afford them. Additionally, the pricing model for the tokens is based on the international gold price determined by the London Bullion Market Association. While users experience a 20% premium when buying or redeeming the tokens, the funds are settled in the local currency.
Expanding Use Cases for Digital Tokens
Initially conceived as a store of value to address Zimbabwe’s currency depreciation and exchange rate volatility, the gold-backed digital tokens are now confirmed to be tradable and capable of facilitating person-to-person (P2P) and person-to-business (P2B) transactions and settlements. The ability to use the tokens for payments could potentially contribute to maintaining the tokens’ fixed convertibility and help defend the country’s exchange rate. Formal retailers, who currently accept the local currency alongside foreign currencies to avoid rejection by authorities, are showing interest in accepting gold tokens as they are considered more stable than the Zimbabwean dollar.
Zimbabwe’s Gold-Backed Digital Currency: A Background.
Zimbabwe’s introduction of the gold-backed digital currency follows its launch of gold coins in 2022 to stabilize its rapidly devaluing currency. The gold-backed digital currency serves as legal tender and a store of value, alongside the Zimbabwean dollar and bond notes. Users can buy and sell the digital currency using Zimbabwean dollars or other foreign currencies. The country joins other African states, such as Nigeria, Ghana, and South Africa, in introducing digital currencies. However, the digital currency’s reception has been lukewarm among economists and ordinary Zimbabweans, who express concerns about its effectiveness in addressing the country’s currency challenges and the lack of trust in the new currency.
Challenges and Skepticism Surrounding the E-Currency.
Economists and experts have expressed skepticism about the gold-backed digital tokens’ potential impact. While the introduction of digital coins is seen as a positive step to stabilize the local unit and address excess liquidity, some believe it is not a comprehensive solution to Zimbabwe’s currency issues. Critics argue that the digital currency may only cater to the wealthy and exclude ordinary people who face extreme poverty. Lack of trust in the new currency and the central bank’s track record also contribute to doubts about its effectiveness. Skeptics compare the digital currency to previously introduced gold coins, which have not successfully resolved the country’s economic challenges.