News
Gold-backed cryptocurrencies
What is a gold-backed cryptocurrency?
A gold-backed cryptocurrency is a stablecoin that is pegged to the price of gold. Its price mimics the price of gold based on the amount of gold held in reserve by the issuer. Gold-backed cryptocurrencies are designed to maintain a more stable value than unreserved cryptocurrencies, but because they are backed by commodities, they are less stable than fiat-backed stablecoins.
Key points
- Gold-backed cryptocurrencies are blockchain tokens that are pegged to a specific amount of gold held in reserve by the issuer.
- Issuers should be highly transparent about their securities and publish independent auditors’ reports.
- Some believe that gold-backed cryptocurrencies can act as a hedge against inflation and economic crises, just like gold itself.
History of Gold-Backed Cryptocurrencies
A so-called stable currency is a class of digital currency that attempts to provide price stability by using a reserve asset. Stablecoins have gained traction in an attempt to offer the best of both worlds: the faster processing and privacy of cryptocurrencies and the lower volatility legal tender.
Developers and investors have been interested in creating a gold-backed digital currency since the early days of the cryptocurrency industry. Gold-backed digital currencies link a token or coin to a specific amount of gold (for example, a token to 1 troy ounce of gold). Gold, like dollars or other fiat currencies, is typically held in reserve, and typically, the gold is held by a third party.
The first 100% gold-backed digital currency is believed to have been E-gold, created by Douglas Jackson and Barry Downey, owners of Gold & Silver Reserve, Inc. E-gold was shut down by U.S. regulators in 2009 for operating an unlicensed money transmission business and facilitating money laundering and other illicit activities.
Gold-backed cryptocurrencies have been classified by regulators as either commodity-backed stablecoins or asset-backed tokens, depending on the jurisdiction you are in.
Concerns about gold-backed cryptocurrencies
Cryptocurrency developers who want peg their gold tokens must be able to support the demand for value, typically by holding that commodity in reserve. The idea is that if the cryptocurrency fails for some reason, the tokens investors hold will be redeemable by the issuers for gold (the gold would likely be liquidated for cash or wire transfers).
Keeping large amounts of commodities, such as gold, in reserve is often a difficult challenge for pegged digital currency issuers. Gold is very expensive to transport and store, so almost all of it is held in custody for issuers in vaults around the world. Coin issuers must be able to prove ownership of the gold they claim to hold and rely on third parties to verify those claims for transparency.
Concerns about holdings
Paxos Gold is the most well-known gold-backed token. It is an Ethereum-based token that claims to to be supported 100% gold. Paxos uses a third party, WithumSmith+Brown, PC, to verify its holdings. In its May 2024 audit report, Withum reported that it had obtained “reasonable assurance” that Paxos Gold is 100% backed by a 1:1 ratio of troy ounces to issued tokens, but:
…our procedures did not include observation of the gold held by these custodians and did not include any validation of the quality of the gold held by these custodians on behalf of the Company and PAXG token holders.
In other words, a third party auditor has put its reputation at risk based on evidence provided by other third parties. It is very likely that the claims made are in good faith because they are putting their business reputation at risk, but doubts always remain when physical evidence is not examined and presented.
Investors should carefully examine who is storing the gold for a particular cryptocurrency and where it is housed before investing. If the gold disappears for any reason, the value of the token disappears as well. Transparency between cryptocurrency developers, third-party gold holders, and investors is critical to building investor trust and, in turn, value in the digital tokens themselves.
Advantages of Gold-Backed Cryptocurrencies
One advantage of gold-backed digital currencies is that the base or floor value of the token will always be equal to the market value of a fixed amount of gold. Because it is pegged to gold prices, a gold-backed cryptocurrency could also act as a hedge against falling overall market prices or inflation.
Investors have traditionally used gold and other precious metals to preserve capital during economic crises – this is also one of the reasons why gold-backed cryptocurrencies were created.
Is XRP backed by gold?
XRP is an open source token issued by the XRP Ledger Foundation. It is not backed by any asset but has a market value that depends on market sentiment for value.
Is there a gold-backed stablecoin?
There are some gold-backed tokens, such as Paxos Gold, Meld Gold, and Tether Gold.
Is XAUT backed by gold?
XAUT is the symbol for Tether Gold, which is said to be backed by 7,667.76 kilograms, or 246,524.33 troy ounces, of 99.5% pure gold.
The bottom line
Gold-backed cryptocurrencies are blockchain tokens that are pegged to the value of a specific amount of gold held in reserve by the issuer. To be considered legitimate, these assets must be regularly verified by third parties and publish statements at regular intervals for investors to see.
These assets are designed to offer greater stability than cryptocurrencies, which have no backing asset, but allow for appreciation if the market value of the underlying asset increases.
The comments, opinions and analyses expressed on Investopedia are for informational purposes only. Read our warranty and disclaimer for more information. As of this writing, the author owns BTC, ADA, ETH, and XRP.