- Zimbabwe has launched its gold-backed digital currency.
- It has also announced how the currency will be valued and distributed.
- We explain how a gold-backed currency works, and how Zimbabwe plans to use it to control inflation.
On Monday, May 8, 2023, Zimbabwe launched its gold-backed digital currency that will help stabilise its local currency, the Zimbabwean dollar, and protect citizens from currency fluctuations.
The currency will be used for peer-to-peer (P2P) transactions among people and businesses to transact business.
John P Mangudya, Governor of the Reserve Bank of Zimbabwe (RBZ), said in a press statement that "the issuance of the gold-backed digital tokens is meant to expand the value-preserving instruments available in the economy and enhance divisibility of the investment instruments and widen their access and usage by the public."
Why is Zimbabwe launching a gold-backed currency?
Zimbabwe's launched its gold-backed currency to rescue its failing currency. According to the Financial Times, the Zimbabwean dollar had lost more than half of its value by the end of 2022.
Zimbabwe's currency troubles have been a long time coming; due to bad monetary policies, its annual inflation rate rose to 47% in 1998.
Things only got worse from there following economic sanctions by the US, European Union, and the International Monetary Fund that led to the collapse of the country's banking system.
By 2008, people saw savings and pensions wiped out by hyperinflation. The RBZ increased money printing efforts and declared inflation illegal. It even changed the denomination of the currency from Z$10, Z$20, to Z$100,000,000 and Z$200,000,000. In 2009, it announced the launch of a 100 trillion note, which was worth $33.
How will the gold-backed digital currency work?
The currency will work like central bank digital currencies (CBDCs) launched by other countries like Nigeria and China.
While there's been no mention of blockchain or CBDCs in reports about Zimbabwe's digital currency, a good way to understand it is to perceive it as a CBDC.
According to RBZ, the currency will have the features of a retail CBDC. It would be distributed to the public through banks and its transactions will be P2P.
The difference between Zimbabwe's CBDC and Nigeria's is that it is not pegged to the country's currency. In Nigeria's case, its CBDC's — eNaira — value is pegged to the naira.
In Zimbabwe's case, however, it cannot be pegged to the Zimbabwean dollar as its value is notoriously volatile.
How is a currency's value pegged to gold?
Zimbabwe's currency peg will work like stablecoins like USDT, which is pegged to the US dollar.
However, maintaining a peg to either gold or the US dollar requires a reserve.
A way to understand this is with bars of gold. Let's assume you have ten bars of gold worth $10 each. However, the bars are heavy and not easily transferable, so you decide to create a piece of paper to represent your gold bars.
For that piece of paper to represent those bars, you must be able to prove that you have ten bars of gold stored somewhere called a reserve.
How much is Zimbabwe's gold-backed digital currency?
The pricing of the gold-backed digital tokens in foreign currency shall remain the same as the pricing model of the physical gold coins as informed or guided by the international gold price as determined by the London Bullion Market Association (LBMA) PM fix.
The gold-backed digital currencies will be issued in two phases. The first phase will be as a form of investment; for 180 days, individuals and banks will be allowed to buy digital tokens. The next phase will see the use of the digital tokens for P2P transactions.
Featured image source: BBC