Zimbabwe’s new gold-backed digital currency: All you need to know

Harare, Zimbabwe –  On Monday, Zimbabwe released a gold-backed digital currency for peer-to-peer and peer-to-business transactions as well as to act as a store of value as the country’s currency continues to lose ground against major currencies.

“Holders of physical gold coins, at their discretion, will be able to exchange or convert, through the banking system… into gold-backed digital tokens,” the Reserve Bank of Zimbabwe said in a statement inviting individual and corporate entities to use the digital currency that can be bought either in Zimbabwean dollars or foreign currency.

The southern African country now joins other African states like Nigeria, Ghana and South Africa that have introduced digital currencies, even as several others have plans in the works.

But the digital currency, the first ever by the country’s central bank, hit the market Monday to lukewarm reception from economists and ordinary Zimbabweans.

Here’s all you need to know about the new currency.

What is a gold-backed digital currency?

Backed by a certain amount of gold, which helps keep its value stable, this currency is tied to the market value of the gold – unlike a fiat currency.

The Zimbabwe gold-backed digital currency will be used as legal tender and a store of value alongside the Zimbabwean dollar and bond notes.

Users can buy and sell it using Zimbabwean dollars and other foreign currencies.

Ideally, backing a digital currency with gold involves having a certain measure of gold reserves and depends on the current market value of gold.

According to state-owned media reports, Zimbabwe in April had 350kgs (12,346 ounces) of gold in reserves valued at $22.80m at the current price and intends to build reserves to around $100m.

Zimbabwe’s gold-backed digital tokens have a vesting period of 180 days, have a prescribed asset status, and are acceptable as collateral for loans, too.

Why has the e-currency been introduced?

Zimbabwe, where hyperinflation has been a recurring economic feature over the last two decades, uses both the United States dollar and the Zimbabwe dollar for transactions.

The latest move to introduce gold-backed coins is part of a wider plan by the central bank to stabilise the country’s local unit, which has been faltering against the US dollar, by mopping up excess liquidity in the market.

The Zimbabwe dollar is currently trading at $1 US for every $2,000 on the black market.

Historically, there have been major policies around currencies as legal tender in Zimbabwe, including the 2009 adoption of the US dollar after hyperinflation decimated the value of the local currency.

Here’s how events unfolded:

Timeline of major policies on legal tender in Zimbabwe

• 1980: The Rhodesian dollar is renamed the “Zimbabwe dollar” in 1980 after independence from Britain.
• 2003: Zimbabwe issues the first series of low-denomination bearer cheques to ease cash shortages.
• 2006: The country issues a second series of higher-denomination bearer cheques until 2008, with as much as 10 trillion dollar notes being issued as inflation ravages the economy.
• 2009: A multi-currency system involving the US dollar and other major currencies – such as the euro, the British pound and the South African rand – is adopted to end hyperinflation.
• 2009: The Zimbabwe dollar is demonetised (struck off as legal tender) as the use of multi-currencies takes precedence.
• 2016: The bond note, a currency the central bank claims has the same value as the US dollar, is introduced in December.
• 2018:  Zimbabwe again reintroduces the Zimbabwe dollar, also known as the real time gross settlement (RTGS) dollar.
• 2019: The US dollar is outlawed in local transactions.
• 2022: Zimbabwe launches gold coins to stabilise faltering currency.
• 2023: Zimbabwe introduces gold-backed digital currency.

 

Some are of the view that recent developments are part of a wider strategy towards an ongoing re-dollarisation process. Zimbabwe was forced to abandon the use of US dollars after greenbacks vanished from circulation. To fix the problem, the country’s central bank introduced bond notes in 2016, a currency it said had the same value as the greenback.

Last June, Zimbabwe introduced gold coins to stabilise the currency. But this has not slowed down the rapid devaluation of the Zimbabwe unit against the US and other major currencies.

The Zimbabwean dollar – which is currently trading at $1US: $2,000 – was $1US: $650 on the black market in June last year, when coins were introduced.

How has the e-currency been received?

“These are financial instruments designed to give an investment alternative to gold coins and other asset classes,” Clive Mphambela, the chief director of communications in the Ministry of Finance and Economic Development, told Al Jazeera.

But economists are not convinced by projections for the e-currency.

Godfrey Kanyenze, economist and founder of the Labour and Economic Development Research Institute of Zimbabwe (LEDRIZ), lauded the introduction of the digital currency but said it would not solve Zimbabwe’s currency woes.

“While the idea of launching digital coins is noble as it mops up excess liquidity and stabilises the local unit, this is no different from the gold coins introduced by the central bank last year that have failed to stem the money supply growth,” Kanyenze told Al Jazeera.

He said Zimbabwe was currently grappling with a “confidence and trust deficit emanating from legacy issues such as when the country experienced hyperinflation that ended in 2009 where people lost their money and savings.”

“The reality is that while the gold-backed digital coins are good, they … cater to the rich and are exclusionary,” Kanyenze said. “Ordinary people don’t have savings and face extreme poverty, which is at least 40 percent. It’s necessary but the gold coins also did not go far in solving the problems.”

Former Finance Minister Tendai Biti attacked the new digital currency, saying the central bank should instead establish market stability by floating the Zimbabwe dollar.

“The introduction of the gold-backed digital currency is therefore a psychopathic exercise in self-delusion,” he said. “The Zimbabwe dollar has failed because of the absence of trust in the regime. The digital currency will suffer the same brutal fate that the local dollar faces.”

8)::The introduction of the gold backed digital currency is therefore a psychopathic exercise in self delusion.The Zimbabwe dollar has failed because of the absence of #trust in the regime . The digital currency will suffer the same brutal fate that the local dollar has suffered pic.twitter.com/feayejLMRT

— TENDAI BITI (@BitiTendai) May 5, 2023

Others said a lack of trust in the e-currency could hinder progress.

Steve Hanke, a professor of applied economics at John Hopkins University in the US, said the gold coins are bound to fail like the gold coins before them.

“After making inaccessible gold coins legal tender in 2022, Zimbabwe is trying to salvage the Zim dollar with another bizarre idea: introducing a digital currency next month,” Hanke said. “Enough is enough. Zim must mothball the Reserve Bank & officially adopt the USD.”