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Digital Currency Backed by Gold?

Bitcoin, meet gold

Written by Geoffrey Pike
Posted April 25, 2016

digitalgoldNow that the Federal Reserve is over 100 years old, more and more people are beginning to understand its function and how much damage it does to our economy.

While the Fed’s stated dual mandate is price stability and maximum employment, its true dual mandate is acting as a lender of last resort for the big banks and helping Congress to run deficits.

Since the beginning of the Fed, the U.S. dollar has lost about 96% of its purchasing power. And that is one of the better currencies over the last 100 years.

Even when the central bank took effect in 1914, there was still a quasi-gold standard. And even with Roosevelt outlawing most gold in the U.S. in 1933, dollars were still redeemable in gold by foreign governments until 1971.

Many advocates of the free market are advocates of a gold standard. A true free market would leave it up to the market to decide what type of money to use. But given gold’s history over thousands of years, it is likely the market would choose gold and/ or silver as the main form(s) of money.

The problem right now is that other forms of money are not able to effectively compete with the Federal Reserve’s form or money (U.S. dollars). The Fed has a monopoly over the issuance of legal tender. There are legal tender laws, as well as other complications against gold such as capital gains taxes. These are the laws we should seek to repeal. We should legalize competition.

As technology continues to advance, there are more possible alternatives showing up. Of course, one of the big stories over the last few years is Bitcoin. It is essentially a digital currency, although it is hard to call it a form of money because you still can’t walk into Walmart and pay with bitcoins. There are some businesses that will now accept bitcoins, but it is still not common.

I think one of the major problems with Bitcoin is that it is hard for non-techies to understand it. If you can’t easily explain it in 5 minutes or less, it will be difficult to sell. Bitcoin may stick around and be used on a limited basis for a while to come, but it is hard to imagine that it can come anywhere close to competing with the dollar.

Bitcoin also doesn’t have the history of gold. A crypto-currency that is just a few years old cannot easily compete with something that has been trusted for thousands of years.

For this reason, if anything is going to replace fiat currencies as a main form of money, it is still likely to be gold. Perhaps something like Bitcoin can serve as a complement to it, but gold (and possibly silver) will be the bedrock.

Combining History and Technology

We may now be getting the best of both worlds in the form of a digital currency that is backed by gold. It was inevitable that this would happen, and we can expect more competition to come in this realm.

We are set to see the “tokenization” of gold. DigixGlobal launched a crowdfunding campaign on March 31, 2016 for its new asset called DigixDAO. The “DAO” stands for Decentralized Autonomous Organization.

Basically, it will allow individuals and businesses to use digital gold tokens. These gold tokens will be “minted” into existence only by the purchase of actual gold bars. In other words, these digital tokens will represent actual physical gold that is held in a central location.

The crowdfunding campaign began with a target of $500,000, but it quickly garnered over $5 million and was stopped after just 12 hours. You could say that it was on a few people’s radar.

In some ways, the system is not all that different from the historic gold standard. The U.S. dollar once represented actual gold, but you didn’t have to walk around with gold coins in your pocket. U.S. coins used to be made partially with silver, so they actually were used directly.

These digital gold tokens have the benefit of technology. You can transfer the ownership of these tokens to someone on the other side of the world in seconds. It is almost just like sending gold to the other side of the world almost instantaneously. The tokens represent ownership of the gold, which will hopefully be audited frequently and kept safe and sound. Of course, if there is ever any serious doubt about this, more competition will not be far behind.

Another interesting point is that you will be able to buy small amounts of gold. It will be denominated in as small of an amount as one-thousandth of a gram of gold, which is equal to about 4 cents.

One objection that is frequently recited against the gold standard is that the limited gold supply cannot serve a growing economy. But while the gold supply does increase over time, this limited growth is exactly what we seek. It means your purchasing power will increase as technology and productivity increase.

And with this advanced technology, there is no problem in trading gold that is the equivalent to what are pennies today.

As I said, a digital currency backed by gold was inevitable, and it will continue to grow with competition. It is the wave of the future in terms of competing money.

Just as email, social media, and Amazon have all contributed to putting the Post Office into its last days of existence, we can hope that digital gold will start having the same effect on central banking. Our prosperity depends on it.

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