I often get told that it would be great to put gold on the blockchain and have 1gram of gold represent 1 token that I can send around the world.
Sounds great, and we at Vaultoro even built one a few years ago but never released it. Here are the top 5 problems with backing blockchain tokens with physical gold.
Here are the 5 reasons,
1: Money issuance:
Minting private money is illegal in most countries and by creating a digital token and saying that 1 token represents 1 gram of gold means you are effectively minting your own currency. This is why Satoshi invented bitcoin in the first place! No single party issues or controls it.
Demurrage is the cost of securing money (big vaults, security, insurance, auditing) If you hold a gram token today but tomorrow it only represents 0.98 gram because the 0.2 was used for a monthly storage, insurance and auditing fee, then that is really not very user-friendly. In fact, we saw an experiment with a coin called Freicoin which was the first Demurrage coin, so if you held it for a while it would take value from your holdings and spread it to the miners. The concept was to promote spending on not hoarding. Well, it spiked on launch hype and quickly died and flat lined. The lesson is that once you learn about cryptocurrency, you don’t want to be holding a currency that mathematically goes down in value if you save.
If two people perform a criminal act and use your gold token in that trade then you could be held liable, in a way because you are holding the actual value in the vault and that represented value was used in a crime. (this has not been tested but It’s interesting.)
4: Getting merchants to accept your coin.
The bitcoin community is actually very large now and has tried for many years to get merchants to accept it. Now, imagine trying to get Microsoft, steam or the mum and pop store down the road to start accepting your gold coin.
5: Allocated Vs unallocated gold.
Allocated gold means the gold is allocated as your legal property and off the balance sheet of the seller. Unallocated gold means that it is on the balance sheet as a liability. This means if the company running the blockchain token goes bust, you could see your gold disappear too. For this reason, Vaultoro only deals in fully allocated gold.
In my opinion, we do not need to back a token with gold because crypto-currencies like bitcoin are so fast that you can jump in and out of allocated gold very quickly, and it gets around all the issues outlined above. You can just convert to gold when you want to and outsource the currency side to the bitcoin protocol. We at Vaultoro have worked hard to get passed the blockchain hype and make people realise that it’s the currency of bitcoin that is so cool, the blockchain and proof of work is amazing but the decentralised currency and issuance in the blockchain is even cooler and makes gold relevant again as a money.