– Will digital gold provide the benefits of physical gold?
– Digital gold and crypto gold products claim to combine efficiencies of blockchain with value of gold
– They are yet to provide the same benefits or safety as owning physical gold
– National mints jumping in on the ‘sexy blockchain’ act
– BOE declares bitcoin ‘not a currency;’ Royal Mint launches blockchain gold product
– Digital gold, blockchain gold and crypto gold is frequently not fully backed, unallocated, pooled and unsecured gold holdings
Editor: Mark O’Byrne
At the beginning of last week Bank of England Governor Mark Carney claimed bitcoin was not a currency on the grounds that it is neither a medium of exchange or a store of value.
Scoffs aside about what this means for the British Pound, there are many out there who are trying to satisfy Mark Carney’s definition of a currency by backing digital tokens with gold.
The Royal Mint is one of them. They announced a new digital gold investment service entitled RMG back in December 2016. Interesting that a sister organisation to the Bank of England is looking at jumping into the crypto currency market by combining the blockchain with gold.
There are plenty of others doing the same thing. It is unsurprising given the recent volatility and negative press around the cryptocurrency market that there are many out there seeing opportunity in the interesting nexus that is blockchain and gold.
Is there value to be found in ‘digital’ money?
Is it possible to find ‘value’ in something which is as digital as fiat itself? For now, the jury is very much divided but there are some in the market who believe they can add value to cryptocurrency by backing it with gold (in some shape or form).
Many in the mainstream believe that this is bitcoin coming full-circle. Since its inception it has frequently been referred to as ‘digital gold’. Now, the backing of crypto currencies, or in fact just digital tokens, with gold has made the term come into its own.
Digital gold has, in fact, been around for many years. It is product offered by multiple online gold trading platforms. This involves buying ‘gold’ which is frequently pooled and the buyers locked into a closed-loop system with a single counter party. The owner does not own an actual physical gold coin or bar or coins or bars which are segregated and allocated in their name. They are captive to that particular platform with potentially poor liquidity, captive, monopoly pricing and counterparty risk exposure.
In the last few weeks there have been a plethora of announcements from both new and well-established organisations that have announced new digital gold products, either with a cryptocurrency, blockchain or just digital token angle. There is a serious danger that new investors believe they are getting decent exposure to this booming cryptocurrency market but with the security of the gold market to support them.
In truth, most of these new gold offerings are likely no better (and arguably worse) than the digital gold products that preceded them. As MoneyWeek’s Ben Judge concluded, last week, ‘my view is that so far, if you want exposure to gold, it’s better to stick with the real deal.’
Something not quite gold-standard about it all
The majority of those in the crypto space know there is something to be said for gold, hence the introduction of so many ‘gold-backed’ digital currencies. Many purport to have an advantage over more traditional means of gold ownership as there are low to zero transaction and storage fees.
This is fishy. Why store something for free and why buy something that is unallocated. We recently wrote about unallocated gold. We mentioned that whilst new gold investors might think that owning gold without having to pay storage fees seems highly attractive, it also comes with risks and, arguably hidden costs.
Unallocated gold is free to store because the bank or institution that you have chosen to buy it through, is using it for it’s own purposes. It is likely rehypotehated and loaned out. You the “investor” or “owner” is actually an unsecured creditor of multiple bank custodians.
Whilst the likes of the Royal Mint’s token is allocated, it is offering free storage. As we explained last year, this is a bit too picture perfect:
We’re all familiar with the expression ‘if it sounds too good to be true then that’s because it usually is’. The Royal Mint is owned by HM Treasury, it pays an annual dividend their way every year. It goes without saying that the United Kingdom is pretty broke at the moment and with the fallout of Brexit still playing out, against a backdrop of geopolitical uncertainty who knows how much worse it will become.
And when it does, how is the government planning on paying to keep the country going? Who knows, but it’s all happening at the same time that the government is trying to encourage you to hold gold in their vaults.
Ben Judge goes onto express our matching concerns about any national mint’s involvement in digital gold:
For many goldbugs, the Mint’s involvement might be a concern, given its ties to the government – governments have confiscated gold before (though not in the UK) and could well do so again. The Mint acknowledges this on its website, asking: “What protection against government confiscation does RMG offer?”, although it ducks the issue, as, of course, there is no protection.
Of course, this isn’t just an issue with offerings from the likes of the Royal Mint, the Canadian Mint or the Perth Mint’s soon-to-launch digital offering. It’s a common problem with many digital gold platforms, especially those purporting to be using blockchain technology.
MoneyWeek questions digital gold value
In a quick summary of the latest digital gold offerings Ben Judge addresses three of them and raises some serious concerns:
AurumCoin, for example, is creating a token that “will always be worth one gramme of pure gold”. Yet each coin is backed by just 0.75 grammes – AurumCoin claims that if each were backed by a full gramme, it would be “forced to charge a fee beyond the value of the currency”, which “defeats the idea”. The team behind it is a cagey outfit, saying that “we are obligated to operate legally and therefore we cannot reveal ourselves at this point”.
Digix, meanwhile, claims to be “fully allocated bullion”. Its DGX token represents “one gramme of 99.99% LBMA standard gold secured in Safe House vaults” in Singapore. The source of the bullion is Singaporean pawn shops. Digix will charge a transaction fee of 0.13% and a custody fee equivalent to 0.6% a year. To recast gold into 100g bars will cost 1DGX (one gramme of gold). It is slated for release at the end of the first quarter of 2018.
A third option is GoldMint, which operates “gold-backed” crypto assets, which “are 100% backed by physical gold or exchange-traded funds”. GoldMint’s physical reserves consist of gold from pawn shops around the world.
Many digital and crypto platforms claim to make the gold ownersh