Regulatory ‘concerns’ spurs innovation in Blockchain

Ongoing regulatory concerns with crypto-currencies have spurred competition within the crypto-currency world, leading to a steady flow of new innovative products. The innovations attempt to address not only regulatory concerns but flaws observed in the pioneering digital currencies.

In less than ten years, we have seen different groundbreaking Blockchain launches, tokenized coins, smart contracts etc . Some are successful but some, not so successful. In all this, one thing is becoming clear though, crypto-currencies have done a lot of good despite the repeated denials by their chief critics, the central banks and state regulating bodies across the world.

The decentralized nature of the Bitcoin payment system have driven home the point, that monopolistic power that central banks enjoy today, contradicts their stated claims of being there to protect citizens. Central banks have not reformed or evolved because there has been no incentive for them to do so, at least until a decade ago.

It was only after the emergence and success of some crypto-currencies, that central banks are now talking about reforming or having digital currencies of their own. Even the most strident opponents of crypto-currencies do grudgingly accept the importance of Blockchain technology, something they never thought of developing themselves.

Still as highlighted earlier, central banks usually point to concerns around money laundering and terrorism when bashing crypto-currencies.

Gold backed currency

Nevertheless, such concerns have seen some entrepreneurs responding by creating products that attempt to tackle those concerns, without deviating from the central premise of crypto-currencies—decentralization.

Aurus, a Dutch based company say it has taken on this challenge by launching what is essentially a gold backed crypto-currency, the AWG. In its whitepaper, Aurus says it has created a token fully backed by gold bullion, traceable through a Smart Contract. In addition, the physical gold is redeemable at any time or one can choose to liquidate the token into fiat money, at any recognized exchange.

In other words, Aurus’ innovation is an attempt to return to a gold standard but only this time, it is happening through the Blockchain technology—the Ethereum Blockchain. A gold standard currency system worked because everyone had confidence in gold and the precious mineral cannot replicated, it has to be extracted.

In addition, Aurus proposes a supply chain Blockchain solution to be made in parallel to the AurusGOLD (AWG) currency. This provides for a transparent solution to the tracking gold through the proposed supply chain. Aurus says this solution will assist in the ‘efforts against money laundering, illegal mining, and so-called blood gold’.

Aurus is set to be rolled out in the near future and it remains to be seen how central banks will respond although we know they will not genuinely approve anything that takes away their power.

US dollar depreciation

The previous gold standard forced governments to live within their means although history shows that even under that system, debasement of currency still occurred.

The gold standard system ended in 1971, when then United States President Richard Nixon announced he was ‘temporarily suspending’ the use of gold in backing currency.

Fiat currencies, which have been around for close to 50 years now, have inherent flaws, which often lead to their failure. Of course, governments around the world try very hard to mask this unfortunate reality. Even then, there are still countless and more glaring examples of this failure, which authorities cannot hide.

Popular Forbes Magazine’s ever expanding list of billionaires is one example that proves fiat currencies like the US dollars, which are perceived to be stable, are actually losing value. The growth in wealth has more to do with loss in value of the national currencies than with actual wealth creation.

Alternatively, we can look at the growth in the value of gold in US dollar terms to see just how far the currency has lost ground. According the LBMA, the US dollar has lost approximately 97% of its purchasing power in relation to gold in the nearly 50 years since the United States went off the gold standard in 1971. The euro has lost over 75% of its value on a gold basis since the single European currency debuted in 1999.

In any case, it is hard to believe that the US dollar’s value has remained the same after the massive quantitative easing in 2009. The Troubled Asset Relief Program (TARP), an economic bailout plan as well as other similar US government interventions, helped to pour hundreds of billions of dollars into the financial system. The resulting increase in money supply naturally leads to inflation but official figures do not seem to reflect this.

By the way, this problem is not limited to the US dollar, other global currencies have taken a battering following similar interventions by the respective central banks. To illustrate again we use everyday examples that we sometimes take for granted. Twenty three years ago, a British football club Newcastle United, paid 15.5 million pounds to buy Alan Shearer, a world record then, yet today, the same figure counts as Manchester City player, Raheem Sterling’s annual salary!

Shearer was a much more accomplished player than Sterling, (a fine but an inferior player in my opinion) but the latter earns much more or is it really more? Furthermore, salaries earned by English football players today are generally several times more than what was earned in 1996. Surely this is not down to performance otherwise England based teams should be winning continental competitions.

Perhaps, that is why the best measure of sporting brilliance is not money earned but medals won, goals scored or trophies lifted. No amount of inflation or depreciation will take away the glow of being crowned champions!

Quantitative easing disastrous for small countries

Turning back to the topic of currency volatility, we see that small countries like Zimbabwe have undertaken quantitative easing interventions of their own, but the results have been catastrophic. The currency collapsed, not once but twice as the deluge of money that follows such interventions overwhelmed the fiat money.

 Zimbabwean authorities have resisted crypto-currencies on account of the perceived weaknesses, seen in pioneering innovations like Bitcoin. One of crypto-currency critics’ favorite attack line is the price volatility something which the AWG attempts to solve.

Nominally, a gold standard will cure the volatility problem, which until now makes other crypto-currencies like Bitcoin difficult to use as unit of account. Gold does not fluctuate widely, yet it maintains value and has consistently outperformed fiat currencies.

Meanwhile, Aurus says the location of gold vaults in different places across the global, satisfies a key attribute for crypto-currencies—decentralization.

In Zimbabwe, there are often whispers about the need to adopt a gold backed currency but few have confidence in the central bank’s ability to run such a currency regime. There is enough evidence to suggest that such a system will be abused.

The privately issued AWG might just satisfy those confidence issues, and if enough Zimbabweans become aware of this type of crypto-currency, there is a good chance it will be widely adopted.  Private currency issuers should understand that the key to success is mass adoption by ordinary people.

The mass adoption of WhatsApp or Telegram apps by communities in the developing world helped to propel these applications into the mainstream.  Crypto-currency developers should listen to consumer concerns more than they should listen to regulators. That way they will produce currencies that will dominate financial markets for a long time.