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Bitcoin Vs RMG. Gold of crypto, VS actual gold tokens.

The Royal Mint has today launched "The New Digital Gold Standard", which is truly a landmark for Crypto adoption.  This is going to be significantly more impactful than is currently understood.  

Today @RoyalMintUK launched a gold backed token @RoyalMintGold RMG. Which is freely tradable for physical gold at their vaults.

 

Gold Tokens

This is important stuff.

The Royal Mint, a UK institution is 11 centuries old , yes that is correct, 1,100 years old. This organisation has been making currency for over 1,000 years and it’s the sole creator of all UK coins and notes.  They have more experience of currency than arguably any other organisation in the world, but more importantly the reputation needed to under write a project like this.

The coin has some very exciting properties:

  • Your RMG token is a representation of the real gold that you own. The royal mint is a custodian only. That means if you own the token you own the gold.
  • You can have it delivered, or presumably collect it from their vaults and leave with the metal in your hand, bag or security truck, depending on how big your bank balance is.
  • It’s tradable and exchangeable with anyone else in the world who recognises gold as valuable. My guess is that’s everyone.
  • There are no holding fees. We’re waiting full details, but it seems you could hold this for your whole lifetime securely. 

What does this mean for the world:

  1. Any other gold blockchain start up is dead. The concern when investing in tokenised gold is the risk associated with the organisation issuing the token. It doesn’t matter how well priced the token is, investors will choose a token with the least possible counter party risk. RMG wins that battle over any start up.
  2. Over the medium term gold can be expected to appreciate in price as every person in the world can now enjoy micro ownership of the asset that has held wealth for centuries.
  3. Bitcoin has a challenger. It’s going to take some time to figure out what the full impact of that means, but bitcoin is the gold of crypto, and now there’s actual gold on crypto.
  4. Monetary base impact could be the most interesting bit. Today we have a gold coin that fractionalises ownership of the most stable store of value in history. Once those coins become exchangeable for goods and services, the monetary base of the world will have been increased by the total value of gold that can be held in secure vaults by very reputable organisations. BUT, if the fractional reserve system declines in popularity there will be a huge shrinkage of the monetary base, instead of inflation (money getting cheaper relative to goods in the long term), suddenly there will be a mechanism for money to get more expensive relative to goods.
  5. Government Debt just got more complicated – The world moved to a fractional reserve system primarily so that large governments (then the US) could issue more currency to settle international obligations. Nixon didn’t want to hold a 1:1 gold relationship to the dollar as it prevented him from printing money. Since then, the world has become hooked on money created by debt, not least the huge debts most western countries currently hold.

This bold move by the Royal Mint should be applauded, and in economic terms could be a very significant change in the structure of world economies.

 

Background

I was clear from my very early days in the Crypto Scene that Stablecoins are an obvious requirement. I remember discussing them in one of the first @coinscrum events I attended circa 2015, hosted by the very knowledgeable Paul Gordon. The problem is simple; until I am paid in bitcoin, pay my living costs in bitcoin and critically pay my taxes in bitcoin, it is unlikely that bitcoin can ever reach the status as the transaction currency for everyday people.

Even if a country did adopt to collect bitcoin for it’s taxes and all the inhabitants transferred from their current currency to bitcoin, it doesn’t currently seem possible that multiple countries could do the same thing. FX markets exist for a reason, and not just for issuing country’s debt. Any casual observer will have witnessed the struggles to match the fiscal need of Germany and Greece in the euro project over the last 10 years and can see why a single global currency without localised fluctuations seems incompatible with the current economic model.

IMO it’s relative stable coins that are required. Currency that is stable relative to the local economy and eco system they operate in. People want to use a coin that’s worth the same on a relative basis to the cash in their environment, measured indefinitely (i.e. it inflates and deflates inline with the local economy). They want their money to be worth what they expect it to be, both now and in the future.

Moving away from economics to technology – part of the magic of blockchain is the opportunity to create long dated smart contracts, so that goods and services can be exchanged in a safe, predicable and stable environment with currency baked in. Imagine if every time you paid for something you had to check if the currency had moved against you by up to 50% since you agreed the price! You may buy your groceries one week and pay nearly double the week before, or nearly half.

 

What are the stable coin options?

 

Fiat Currency Backed Token

The simplest solution from the very beginning seemed to be a one : one coin, capitalised with real currency. This would see coins for each major international currency issued only when an equal deposit was held. This is easy to understand, scalable globally and provides the best method of stabling currency – being directly pegged to the underlying asset!

The issue with this, is where is the real currency held? Is it held in a company’s bank account? That’s a bad idea, as risk of fraud, bad management and dipping in to client funds adds a layer of risk.

A secure bank account with a major international bank? That’s a better idea, until you pause to think about the history. Lehman Brothers collapse is relatively fresh of mind, but that’s nothing compared to what happened in the 20th century - during the year 1930, 744 banks closed, in the first 10 months alone. Ultimately there is no bank credit worthy enough to help the currency requirements needed for mass adoption of a stable coin.

 Along came @Tether to the party. There has been some controversy around this project – Tether held customer funds with Taiwanese banks via Wells Fargo, who decided to cease that relationship in 2017. In Jan 2018 Tether ceased having a relationship with their auditor, but they still list their funds as held in a reserve account “regularly audited”. Many of their services are suspended, and whatever the outcome, Tether has failed in it’s bid to provide a stable token, since the currency began trading below the dollar benchmark in 2017.

 

Perpetual Motion Machines

A perpetual motion machine is a machine that keeps moving indefinitely. A quick search of Wikipedia states ‘there are not any real "perpetual motion" devices’. Mankind hasn’t figured out how to defy the laws of physics yet. Nor has this approach worked in creating stable coins through financial engineering.

@prestonjbyrne covers perpetual motion machines well here. I agree completely, setting up a derivative of something to create stability in the same thing can seem as impossible as defying the laws of physics. Financial products have existed in regular FX markets for centuries, and not solved this problem, not to mention that it doesn’t make sense. You may be able to reduce volatility, maybe dramatically reduce it, but where there are underlying value differences between to instruments there will be price movements. The more stability that’s promised, the more financially devastating the impact once its found to be a false hope.

"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction." - @BillGates

 

Daniel Halstead