A New Cryptocurrency backed by Gold? A new way to validate the authenticity of jewels?
Whether the government likes it or not, Indians ARE obsessed with Gold. There is a 15% growth year on year, and the sales of precious jewellery are expected to touch $90 billion in the next couple years. Big brands are adding new retail stores like there is no end.
With the increasing appetite for Gold, this article explores the issues and solutions that can be addressed with blockchains.
Bitcoins, being the most populous crypto-currency — solves the problem of ‘trust’. It is done using an underlying technology called ‘blockchains’. For simplicity, assume these are chains of blocks, and each block contains the transactions that are verified and sealed and agreed upon by a quorum of users.
Blockchains, like ‘databases’ not only stores data but also make sure that the transactions are trusted and cannot be (easily) modified — And this is done without any third-party entities like banks but algorithmically by computers.
How blockchains internally work is a separate topic of discussion. For the curious minds, Mohit’s article will give a very good introduction.
People used to buy gold in the form of coins or bullion. After accumulating a certain quantity of gold, it becomes a potential risk because of its value and will have to start thinking of safeguarding it. Since the locker at any normal home is risky, a bank-locker is used. But again, operating a locker is not easy, and in this century it is definitely not efficient to visit the locker once a month to deposit the purchased gold.
Also, transferring gold to a friend or a relative who lives in a different city becomes a logistical nightmare, considering the safety issues in transferring gold.
ETF (Exchange Traded Funds) or e-Gold – Similar to a Stock/Share; to buy an ETF, a demat(DeMaterialization) account is required (which is not easy for a typical gold buyer – which is almost like most of India) and usually end up paying more transaction fee to buy and sell. Transfer between demat accounts is not easy either.
Also, the money spent on buying ETF is supposed to be used in buying physical Gold. For every ETF bought, one gram of gold should be purchased by the issuing authority and stored in the vault. What if the issuing authority uses this money to reinvest on the secondary market?
Jewellery retailers also have another interesting model to save gold; an EMI is paid every month, and by end of the year, jewellery worth the gold could be purchased. Good, right? But now the trust is on the retailer instead of a bank!
The recent incident that happened in Chennai shows the risk involved on trusting a retailer.
With the evolution in technology, can storing and transacting Gold be done any better?
Consider the following scenario, wherein
1) Each gram of gold or an ounce of Gold can be a token or a coin, issued by this blockchain application (Similar to a single bitcoin).
2) All transactions, which is buying and selling of gold will be registered on a distributed ledger.
3) Appoint a separate body to audit and make sure it is really backed by physical gold. (A kind of Distributed Autonomous Organizations (DAO))
4) Individuals may never own (real) gold but will have digital gold.
5) Transfer of Gold become easier, like how money is transferred using digital wallets.
Should Government do this, or financial institutions like a bank do this? Or a startup?
Ideally, Government should be doing this, and so are the products like Ola and Flipkart. But it usually doesn’t work that way.
So will banks do this? Yes, an Indian e-tailer, payments bank are already selling gold digitally. But, we cannot validate their accounting proof, and of course, cannot audit how they are managing the physical gold!
Startups working on blockchains are creating gold-backed tokens; let us call it AuCoin like BitCoin. AuCoins are stored in a distributed ledger, and each AuCoin is backed by 1 gram of gold( or any standard units).
Crypto coins are well known and tested for the accounting standards, and the next thing to be made sure is that they are really backed by Gold, and are stored in proper vaults.
Any user who has access to the blockchain can verify transactions, and for verifying a transaction, they could be incentivized as AuCoins.
By now, any tech-guy would be wondering why not do the same with a database? That is what the payment banks are doing. However, using block-chains has couple side effects.
Since these coins are backed by Gold, and as they are a form of cryptocurrency, there is an element of fluctuation in the value of the coin. Depending on the demand/supply the value would tend to rise or fall. If things are bad, the value of coins would still be equal to that of the value of a single unit of Gold. So, the currency technically cannot crash, unlike other cryptocurrencies which do not have any backing.
The other side effect is that, this coin could be used as a typical currency. Conversion to other currency may not be required. Making it easier to buy any products.
The authenticity of Gold Jewellery is done using a BIS(Bureau of Indian Standards) Hallmark certificate. Gold Jewelry is inspected, and a unique laser-based seal is marked, which identifies the purity of the metal, and the retailers’ or issuing centers’ symbol.
BIS hallmarking is a Government body that recognizes certification centers all over India. They provide licenses to centers that comply with certain norms and are authorized to certify Gold Jewellery. While the seal to be engraved can be somewhat forged, the BIS body is very strict on the certification centers. In case of any wrongdoing, they would cancel the license.
The seal is an engraving of symbols, it can also be done by anyone having an engraving machine, making it vulnerable to forge.
One solution is to assign unique token, or an ID to a single piece or a set of jewellery, and use that ID along with the seal, and uniquely take a picture of the product and dump it on an irrevocable distributed ledger.
By doing this, tracking of errors would become easy. There could be a national register of all products that are hallmarked; making it easy to resell the products even after a decade or so.
Being closely associated with gold industry, the process involved is much more difficult and it is generally time consuming to do this; but it’s not impossible though.
There are several gold-backed currencies active right now. Some are tweaked to work for local markets, and some as a global currency.
The physical currency was/is actually backed by Gold, and so this form of cryptocurrency could be a real replacement of physical currency? Making us really go digital? Could a block-chain based, gold-backed currency become each country's National currency? Or could there be a Global currency backed by Gold, and powered by Blockchains? Let's wait and see.
Everledger, is working on a block-chain based model to store and safeguard loose diamonds. They claim to save a lot on insurance, and verify the authenticity of the jewel as well as make sure the products are conflict-free.