Zimbabwe has turned to the gold standard in the hope of buttressing the beleaguered Zimbabwean dollar, first issuing gold coins and later digital tokens that it hopes to see used as a means of payment.
In June 2022, the Reserve Bank of Zimbabwe introduced the Mosi-oa-Tunya gold coin, which can be purchased from the bank in domestic currency or a variety of offshore ones. The central bank guarantees that holders can sell the coins (after a 180-day vesting period) for the prevailing London Bullion Market Association spot price in dollars, or at a 20% mark-up in Zimbabwean dollars.
It is likely to be the wealthiest in society that are able to access the gold coins (even in small denominations) so, if the Zimbabwean dollar cheapens, this policy will exacerbate inequality.
The gold coins are issued as a store of value and, since the central bank undertakes to redeem them in dollars, it effectively provides a peg to the US dollar. The orthodox economist’s position would most likely be to recommend a simple dollar peg, but Zimbabwe struggles to keep enough dollars in its circulation and reserves for this to be viable.
There is only one way for Zimbabwe to acquire more dollars: purchasing in the foreign exchange market. Gold, by contrast, can be obtained domestically by increasing mining operations.
However, the RBZ will have to maintain sufficient dollar reserves to fulfil its promise to buy back coins for dollars, although it no doubt hopes that the 20% premium it offers those who wish to redeem their coins for Zimbabwean dollars will encourage people to accept local currency.
While gold coins might be a means of distributing a non-dollar-denominated store of value throughout the economy, the RBZ’s aim is for them to form the basis of a medium of exchange as well. Obviously a troy ounce of gold is not a practical unit for day-to-day purchases. The bank is releasing smaller denominations but, more importantly, it has released digital tokens (denominated in gold milligrams), which represent ownership of gold coins held in the vault.
The RBZ says that these tokens can be used for payments, with tokens available for purchase via banks, which will create dedicated e-gold wallets and cards to facilitate person-to-person or person-to-business payments, both online and offline. This is, in effect, a gold-backed central bank digital currency. The economics of gold as a defence against inflation are somewhat heterodox but not absurd. Introducing a CBDC is a complex business, however.
Questions around implementation abound. Not only will the central bank have to retain the currency reserves to ensure that it can redeem the coins and tokens, it will also have to maintain the gold reserves backing the tokens.
While central bank issued, Zimbabwe’s gold token is more akin to a stablecoin – a token with a price pegged to a real asset. The robustness of that peg rests on the market’s assessment of the token’s convertibility into the underlying asset – in this case, a gold coin.
Tokens representing gold ownership are nothing new. The stability of gold combined with the convenience of a digital payments system is an attractive concept, but its success requires trust. Generating that trust requires transparent, independently conducted audits. Without these, the market for secondary trading in digital gold tokens will, in the presence of stress, become disconnected from the market for the physical coins.
There will also be questions about how effectively they fulfil their role as a means of payment. Do Zimbabwean merchants (those who accept digital payments) universally accept these tokens?
The bank has delegated all matters of usability – online versus offline payments, scalability, security, acceptance, user experience – to commercial banks, which are tasked with distributing the tokens. That’s all very well – most of those functions are probably best handled by the private sector in any case – but what is the bank’s methodology for ensuring these services are provided in a uniform, high-quality fashion?
The RBZ has said that the token settlement system is working on the bank’s existing systems, but it may look at blockchain ledgers in the future. Precisely what it aims to achieve by doing so is not yet clear.
While an interesting experiment in addressing inflation without redollarising the economy, a gold-backed CBDC cannot be more than a curiosity without a careful implementation process and robust, independent verification of reserves. Hopefully the RBZ can deliver.
Lewis McLellan is Editor of the Digital Monetary Institute, OMFIF.