Digital gold

The world’s oldest international money, gold, could become an important element of the world’s newest currency — digital money.

Digital money systems are being developed to offer methods of payment that are cheap, secure and that can be used over the Internet in the same manner that cash is used in day-to-day business transactions. Digital money is also more practical than credit cards for small purchases.

“Digital gold-backed bonds or other digital gold instruments could have significant advantages over the use of established currencies,” says Richard Rahn, a Washington-based expert on the development of digital money systems.

In Digital Money and Its Impact on Gold, a report commissioned by the World Gold Council, Rahn says gold has two distinct advantages:

“First, many people instinctively trust it. . . [The] idea that gold is intrinsically valuable is ingrained in folk history. Thus, a digital currency that was perceived to be adequately backed by gold would have an automatic advantage in competing for people’s trust over many other currencies.”

The other advantage is the substantial demand that already exists for holding gold assets for purposes other than as a medium of exchange. “This existing demand for gold assets gives gold an important head start over all other competitors — except major national currencies,” says Rahn.

He adds: “Like the U.S. dollar, gold is recognized worldwide as a store of value. This certainly makes digital gold a candidate as an international digital medium of exchange.”

Rahn acknowledges, however, that digital gold faces many obstacles. Currently, few e-commerce or brick-and-mortar businesses accept gold in exchange for goods and services, and there is a need to establish widespread confidence in the financial integrity of a gold currency system. In some cases, this will require a digital gold currency fully backed by physical gold; otherwise it is unlikely to attract and retain the confidence of users, unless it’s underwritten by an established financial institution of unquestioned strength.

The costs associated with using digital gold is another issue that will need to be resolved. These costs will need to be competitive in comparison with other payment methods, such as credit cards, bank transfers and alternative gold payment methods. Also, there will need to be liquid gold debt instruments, such as bank accounts with interest rates, in which to invest. The success of companies that enter this market will depend on their ability to design and market gold products that meet the needs of consumers, businesses and investors.

Rahn argues that it’s not a question of whether there will be digital money, but rather, of how long it will be before paper currency and coin are eliminated?; What portion of digital money will be issued by private institutions versus today’s policy of currencies only being issued by government and the central banks?; And how much digital money will be made up of gold?

Digital money is destined to become the dominant form of money because it is less costly to handle than cash, cheques or credit cards and is more secure and efficient.

Of note, institutions that currently own or produce gold are developers and marketers of digital gold products. “There are no longer technological reasons why private companies can not create international gold-backed monies to compete with government issued monies,” Rahn says.

Already one group, e-gold (www.e-gold.com), is offering digital gold as a means of financing trade over the Internet. A second group, GoldMoney (www.goldmoney.com), is expected to launch shortly.

The complete text of Digital Money and Its Impact on Gold can be downloaded at www.gold.org

— The preceding is an excerpt from an information bulletin published by the London-based World Gold Council.