Could Blockchain Reawaken Gold’s Role as a Payment?

A research report by Celent has looked at whether or not gold could be brought back as a means of exchange through bitcoin’s underlying technology, the blockchain.

The report, Micro Gold: Assessing the Use Case of DLT and Physical Gold , determined that the blockchain could transform the way gold is utilized as a form of currency, delivering the benefits associated with bitcoin.

According to senior analyst in Celent’s securities and investment practice, John Dwyer, a currency needs to have three qualities, reports EuroMoney . These are a store of value, a medium of exchange, and a unit of account for valuing goods and services.

Even though gold may have been used as a form of currency in the past, that is no longer the case in today’s society. Not only that, but the cost of storing it is too high for practicality.

Blockchain technology, however, could hold the answer.

Dwyer states that putting gold on a distributed ledger means that the ownership of gold can be broken down into small amounts. He mentions Goldmoney, a fintech firm that holds gold in vaults and offers a MasterCard through which payments can be made, as an example.

He said:

In the case of Goldmoney, this is 0.001 grams worth of gold. This ownership is maintained on a digital ledger and facilitates the movement of micropayments.

Banks Getting Rid of Large Denominations

Dwyer refers to the fact that fiat currencies are now delivering negative nominal interest rates (NNIR), which means they no longer satisfy the store of value function.

According to Dwyer, Japan is responding to NNIR by enabling its consumers to increase the number of safes that provide them with a means of keeping money outside of financial systems.

He said:

It is interesting that the European Central Bank announced on May 4 that production of the €500 note will cease in 2018. This move certainly makes hoarding large quantities of physical cash by financial institutions more difficult and costly.

However, this is unlikely to get people to turn their attention to the use of gold anytime soon.

Gresham’s Law

According to Gresham’s Law, digital currencies such as bitcoin should be attractive to people as a form of currency, due to its lack of intrinsic value. However, it doesn’t have gold’s long track record, therefore, it doesn’t have a high level of trust.

Global Advisors owner, Rus Newton, said to EuroMoney that:

A lot of people are going to find it somehow easier to buy into the idea of gold as a store of value than bitcoin, given that gold has been around rather longer.

Not only that, but with over $7 trillion of physical gold and only around $12 billion of digital currencies, it shows that digital currencies have a long way to go before they can overtake gold as a medium of exchange.

But, as CCN.com reported this year, bitcoin trading does have the ability to overtake gold trading.

It remains to be seen, however, whether DLT’s and gold will team up in the future to reawaken its use as a form of exchange.

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