Richard Nixon un-pegged the US from the gold standard over 50 years ago, and with it the rest of the world began accepting the free-floating currencies we use today. At the time it was an extremely bold move, but one which was deemed necessary for continued economic growth and to fight against inflation rates.

At times of global downturn people often look to the economic system and the ways in which we can fix it to provide greater stability, and our current world is no different. Some people are looking to the gold standard as a way to alleviate ourselves from volatility.

Some companies are attempting to adapt the gold standard to tokenisation, combing the old ways with new technology. Rather than buying gold directly, companies are establishing this mechanism within the blockchain. I spoke with two companies which are minting a modern twist on an old concept.

Are gold-linked digital assets a new concept?

It’s worth mentioning that this is not the first time someone has attempted to make a gold-linked digital asset, there have actually been a few attempts which formed some of the background for early crypto currencies.

The most infamous of these being egold, which was started in 1996 by Dr Douglas Jackson and Barry K. Downey. This attempt quickly became a haven for criminals, resulting in the founders pleading guilty to money laundering and illegal money transmitting charges in 2008.

In an interview in 2020, Jackson commented: “Although we developed the most powerful capabilities of any payment system then or since to track down bad guys who had used the system for illicit purposes, that wasn’t sufficient. A more effective AML program would have largely prevented such misuse and made us much less vulnerable to the incessant reputation attacks we were subjected to.”

Why is gold attractive in the digital asset world?

Protection against volatile markets is one of the main reasons behind much of this thought. Jai Bifulco, chief commercial officer at Kinesis, explains that “gold is a safe haven asset, it’s a hedge against inflation. It’s tried and tested throughout 5000 years.”

Bifulco claims that instability was something Kinesis has been anticipating for some time: “We always knew there was instability going to come because inflation is cyclical, and it already exists around the world.”

This was a sentiment which Tether Gold shared, their spokesperson states: “Gold has a long history as a store of value. Unlike fiat paper currency, coins or other assets, gold has maintained its value throughout the ages.”

Bifulco further comments: “That’s just a by-product of politicised fiat currency, printing money based on political decisions, devaluing currency, and that affecting all citizens. You can’t print gold.”

He continues: “Fiat is a modern experiment. It fails every 100 years. Fiat continuously fails. This is not the first failed fiat currency we’re going to have, and it won’t be the last. Whereas Gold has maintained its value.”

Tether Gold explained how they see gold as providing stability: “With rising inflation globally Tether identified an opportunity for those wanting to pursue financial freedom through assets that hedge against inflation. Gold sometimes moves opposite to the US dollar because the metal is dollar-denominated, making it a hedge against inflation. Gold has the benefit of having commodity characteristics while also having a monetary identity. It is for this reason that central banks hold gold as a monetary reserve asset. Additionally gold sometimes moves opposite to the US dollar because the metal is dollar-denominated, making it a hedge against inflation. With Tether’s innovation it was possible to address inflation through the creation of Tether Gold.”

It seems that gold-linked digital assets are something which can provide some feeling of stability from the markets, but especially in for those of digital assets. For traditional investors and even the newer generation, crypto can be too much of a risk for their investment. Tying these to gold might hedge that. This is what Tether Gold argue: "People see gold as a way to pass on and preserve their wealth from one generation to the next. Tether Gold holders seek these intrinsic benefits of the metal as a store of value along with other highly desirable features that come from tokenisation." 

However, in 2020 the concept of bringing back the gold standard made the news as gold standard advocate Judy Shelton was advising former president Donald Trump, Michael Klein, argued that the price of gold actually moves around a lot. When pegged to a currency, this can be unstable.

Furthermore, this doesn’t really satisfy one of the main reasons for abandoning the gold standard – the lack of opportunity for financial growth and yield which gold doesn’t offer.

Does gold offer enough yield?

Bifulco has an argument against the lack of growth or yield, stating that their system actually does offer this possibility: “We’re able to do that not by risky trading strategies or hedging, we simply share fee revenue.”

Adding to this argument, Bifulco states that the system that they are building at Kinesis is not like that of the “old” gold standard, it’s a decentralised one. For Bifulco, decentralisation solves one of the main reasons which the gold standard collapsed in the past – when nations tried to redeem their gold, particularly France where the gold standard was referred to as “America’s exorbitant privilege.”

He comments: “Instead of having one central source everybody owns all their own pockets of gold and it is centrally managed by an independent company that doesn't have a legal right to your gold.”

 “Imagine you’ve got a million people in Indonesia, that all independently own their gold, that is stored in one gold hub in Indonesia. Now all the wealth of the citizens, even with it being decentralised and the gold independently owned, is all pooled in that country, maintaining sovereignty in a tangible asset,” Bifulco continues.

He further notes that within their system, if an individual asks for their gold this can be given to them quickly. He explained: “We have 14 vaults across most trading hubs around the world. If someone asks us for their gold, we can have a local hub ship it to their door within a few days.”

Indeed, as per Bifulco’s example Kinesis have already done some work with Indonesia. The company formed a long term public private partnership with the Indonesian government and has offered its products across multiple channels including PT POS, the Jakarta Exchange Fund, and the Indonesia Commodity and Derivatives Exchange.

It is not completely clear at this point what the impact on the Indonesian economy will be of this program, but in their case study of this project, Kinesis have said they anticipate “value of Kinesis cross-border payments to replace costly remittance providers, additional wealth will flow into the Indonesian economy, through citizens purchasing essentials and investing in wealth creation activities. Over time, Indonesia will experience a rise in living standards and inclusive, sustained economic growth, which betters every member of society.”

Conclusion

Talking to those involved in the space, I can see the benefits which gold-linked assets can offer against inflation. Personally, however, I don’t see this as something which will definitely catch on as a completely new system or system replacement.

Having said that, it could offer a nice alternative to many who are concerned about the volatility in digital currencies, but also don’t want something which is directly based on a country’s fiat. It seems like something which has the chance to become part of the digital currency mix.