Gold and Cryptocurrencies: Promising Interactions?

Bitcoin is often presented as "digital gold" (21 million limit, no money printing possible, no central authority to manage issuance), but the question immediately arises: competition or complementarity? We're leaning towards the latter, with both assets facing fiat currencies, which are inflationary and de facto subject to governments that are unable to return to balanced budgets (which means printing money to finance them, and hence inflation). The current remission, with the Fed and ECB raising interest rates, is only temporary.

Gold benefits from a multi-century history and unrivalled confidence, while cryptocurrencies bring the innovation of blockchain, and this is where synergies can occur.

There are already two "stablecoins" backed by gold, i.e. a cryptocurrency whose price replicates that of gold, in this case an ounce of gold quoted in dollars. The best-known stablecoins are those backed by the dollar, namely USDT (with a capitalization of $83.7 billion, the 3rd-largest crypto after Bitcoin and Ether), USDC ($26.7 billion capitalization), Dai ($4.2 billion) and others. In gold, two stablecoins largely dominate the competition: Tether Gold (XAUT), issued by Tether, which also manages USDT, and Paxos Gold (PAXG). They weigh the same, with a capitalization of $485 million each, far behind the dollar-backed behemoths, but without being ridiculous either (next on the list is the Perth Mint Gold Token with a capitalization of $2.3 million, too small to be reliable).

Both stablecoins are backed by physical gold reserves, in a company-controlled Swiss vault for Tether gold (XAUT), and in the vaults of Brink's in London for Paxos Gold (PAXG). Now, we need to be sure that the quantity of gold stored corresponds exactly to the number of tokens issued... Both companies claim this, but we're forced to take their word for it. Tether is not very transparent about its USDT and dollar reserves, so there's an obvious element of trust.

Physical gold is intrinsically safer than dollars: the yellow metal is highly liquid, even and especially in times of stress, and as a real asset, it is protected against bank failures. What's more, the fact that gold is stored outside the banking system offers additional security. In absolute terms, a gold stablecoin is far more solid than a fiat currency stablecoin, provided its reserves are guaranteed.

The advantage of a gold stablecoin is obvious: it can help re-monetize the precious metal. Indeed, nothing could be easier than exchanging cryptocurrencies via a wallet downloaded onto your smartphone. In a country where inflation is raging, where the banking system is failing, if you don't want to trade in bitcoins because they're too volatile, or in dollars because inflation is eroding their value, a stablecoin-gold appears to be an excellent alternative.

Another avenue is also opening up: tokenization. This consists of a company owning an asset (real estate, shares, art objects or gold) creating a certain number of tokens representing that asset, which can then circulate on the blockchain. An illiquid asset thus becomes easily liquid, a non-divisible asset (an apartment, a gold bar) becomes instantly liquid, and an asset stored outside the market begins to circulate in the economy. The prospects are enormous. Large quantities of gold lying dormant in vaults could start to circulate, facilitating the re-monetization of gold.

Chainlink (LINK, the main "oracle", i.e. one that transmits real-world data to the blockchain), one of the leaders of the crypto ecosystem, recognized for its seriousness, is getting into the game. For this company, tokenized gold is a "next-generation solution for gold ownership" that creates ownership rights for gold held in any vault. The benefits of tokenized gold are, according to Chainlink, numerous: "greater accessibility", "enhanced transparency", "increased efficiencies and reduced costs", "deeper liquidity" and "unlock innovation". Chainlink's role is to offer services to "build secure, efficient, reliable, liquid and transparent Web3 platforms" for tokenizing and circulating gold and other assets. What remains to be done is to have the gold reserves and the number of tokens in circulation audited by an independent body, in order to establish transparency and trust.

Finally, the demonetization of gold triggered on August 15, 1971 by Richard Nixon's famous decision to suspend the convertibility of gold and the dollar, thus burying the Bretton Woods Agreement, could soon come to an end via the world of cryptocurrencies... A tremendous source of hope.

What we're talking about here is re-monetization, a dimension that has disappeared from gold. But the main function of physical gold, which is to protect capital over the long term, that of savings in the strict sense of the word, with a secure holding in one's own name, has never disappeared. Especially in these times of inflation, it is proving its necessity and relevance.