Russia and China buying gold could set the stage for a gold-backed cryptocurrency, suggests a former EU minister. However, such a scheme would still be inferior to Bitcoin, according to Russian economist Vladislav Ginko.
Russia is aiming for a “monetary reset”
Russia was the largest gold buyer last year and has quadrupled its gold reserves in the past decade. In fact, the country has increased its spending spree in recent years, especially after US-led economic sanctions were imposed in 2014.
It is noteworthy that the Central Bank of Russia added 651.5 tons in 2018 – 74 percent more than in 2017, according to to the World Gold Council. It is estimated that the country currently owns about 34,000 tons of gold.
But Russia is not alone. China showed similar behavior when purchasing 32.95 tons of gold in the first quarter of 2019.
So why are the two neighboring superpowers so eager to replenish their gold reserves?
Bruno Maçães, Portugal’s former European Minister, says that although there is no formal coordination, the two countries can expect mutual benefits from undermining the US dollar as a world reserve currency.
“The sheer size of the purchases may reveal bolder motives as Moscow prepares its first volley in the coming battle for a monetary reset, ”he added.
Russian ‘gold coin’?
Maçães also points out that this potential “reset” could also have ulterior motives. He writes:
These steps come at a time when gold has become attractive as an anchor for new experiments in digital currencies. Gold and crypto are a heavenly marriage that combines the stability of gold with the convenience and security of the blockchain.
These digital tokens would circulate on a global online platform and would be “fully backed by gold reserves held in an international trust that protects them from government interference”.
Interestingly, he notes that private financial institutions would be responsible for creating these “gold coins” and thus ultimately controlling the supply. At the same time, transactions would be peer-to-peer.
Money transactions would be carried out directly between end users, without the intermediary of banks or governments.
There are only a couple of problems
However, the former EU minister has only superficial knowledge of blockchain technology. For one thing, the network doesn’t do it automatically when you call it a ‘blockchain’.comfortable ”, let alone“ safe ”.
Second, the node software must be distributed between peers around the world. It can’t be limited to a few data centers operated by a handful of private facilities. Such a scheme reintroduces central points of failure and makes it a cryptocurrency only in name.
In other words, you can’t just flip a switch to activate a secure and trustworthy blockchain. It takes years, if not decades, for the network effect to make it viable and valuable (think: internet).
Third, regardless of relative price stability, the physical properties of gold still incur costs for transfer, storage, and trust.
The latter in particular would be a major problem for Russia. Gold is not a risk-free commodity when it comes to geopolitics. Venezuela, for example, learned that lesson the hard way earlier this year.
Not your vault, not your gold. https://t.co/ThSkkuXGqO
– Jesse Powell (@jespow) January 25, 2019
“[G]old is a US-based asset, and Venezuela’s experience has shown that in the event of severe US financial sanctions, Russia may also face selling gold, as such a deal would require transactions nominated in USD, ”said Kremlin economist Vladislav Ginko Bitcoinist.
“Gold is high risk” in contrast to Bitcoin
Bitcoin, on the other hand, has been battle-tested for over a decade. Its blockchain is secured by an astonishing amount of increasing computing power, which today makes it the de facto “metric system” of cryptocurrencies.
In addition, a Bitcoin is always equivalent to a Bitcoin despite price volatility and “Unbacked”. But more importantly, there is no central authority that can change the rules. This makes it the most politically neutral form of money in the world of all time and an ideal foundation for building not only applications but a new global economy as well.
Ginko, who previously stated that Russia bought over $ 6.8 billion in Bitcoin for these reasons, agrees.
“Bitcoin is doing well, so Russia is not considering issuing gold-backed stablecoins as gold is a USD-based asset. And the valuation and sales potential of this asset could be very limited in the event of new US sanctions, ”he said.
Gold is a high-risk, unstable asset for Russia.
Then why is Russia buying so much gold when the precious metal is still largely controlled by the US?
Ginko says the reason has more to do with its domestic gold mining industry. He explained:
The Russian central bank’s gold accumulation appears to be significant only in physical terms. In relative terms, however, this is only a small fraction of the total reserves (minus 19%). The main reason for Russian gold purchases is to support the gold market. In 2018 … Russia exported only 5.4% (3.4 times less than in 2017 year) of its gold produced, so the huge amount of this domestic metal production was bought up by the central bank.
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