Zimbabwe’s gold-backed digital currency

In May 2023, Zimbabwe released a gold-backed digital currency for peer-to-peer and business transactions.
The gold-backed digital currency will act as legal tender and a store of value alongside the Zimbabwean dollar and bond notes.
The Reserve Bank of Zimbabwe aims to support its struggling currency and fend off extreme demand for the US dollar by mopping up excess liquidity in the market.

In May 2023, Zimbabwe released a gold-backed digital currency for peer-to-peer and business transactions. The currency was meant to store value as the Zimbabwean dollar continued its steep depreciation. International gold prices controlled by the London Bullion Market Association will dictate the local pricing of Zimbabwe’s digital currency tokens.

The southern African country joins countries like Nigeria, Ghana and South Africa that have introduced digital currencies. Moreover, several others have plans in the works. But the digital currency, the first ever by the country’s central bank, hit the market with a lukewarm reception from economists and ordinary Zimbabweans.

Understanding Zimbabwe’s 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. As such, the gold-backed digital currency will act 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 intended to build reserves to around $100m. Zimbabwe’s gold-backed digital currency tokens have a vesting period of 180 days, have a prescribed asset status, and are acceptable as collateral for loans.

Why Zimbabwe needs a digital currency

Significant inflation has seen Zimbabweans exchanging all their local currency in favour of US dollars to stop savings from losing value. Consequently, the Reserve Bank of Zimbabwe aims to support its struggling currency and fend off extreme demand for the US dollar by mopping up excess liquidity in the market.

Since the end of last year, the Zimbabwe dollar has lost more than half its value. As people looked to protect the value of their savings by exchanging it for the less volatile US dollar, it quickly emerged that a shortage of dollars was also increasing exchange rates.

July 2022 saw Zimbabwe issue gold coins worth around US$1,800 each. The venture saw some success, although there was a consensus that the coins were not accessible enough for most Zimbabwean citizens. The Reserve Bank’s latest experience in attempting to solve its currency crisis comes from launching a new digital currency backed by gold.

Moreover, some believe that recent developments are part of a more comprehensive strategy towards an ongoing re-dollarisation process. Zimbabwe had to abandon the US dollar 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.

How trust will affect Zimbabwe’s gold-backed digital currency

Some people suspect the upcoming elections have partly inspired the launch. Moreover, others feel that the Zimbabwean Central Bank Digital Currency (CBDC) is simply an attempt to revive a struggling currency. However, trust issues could prove a critical barrier to the success of Zimbabwe’s gold-backed digital currency.

A recent International Labour Organization report revealed that 76 per cent of employment in Zimbabwe is in the informal sector. With such a large proportion of operations and services existing without informing the relevant authorities, cash has continued to be one of the region’s most popular forms of money, alongside mobile money.

As trust in local currencies remains low, the Reserve Bank will hope that the digital currency can succeed thanks to its link to the more secure gold it is backed by.

Gabby Kusz, CEO of the Global Digital Asset & Cryptocurrency Association, explained the importance of trust in the success of the currency:

“Zimbabwe has suffered for many years from hyperinflation – given their difficulties in garnering public trust in their currency due to monetary policy mismanagement, I would expect the gold-backed currency to garner interest from citizens.”

“However, the degree to which this trust is lasting will depend again on trust in the government underpinning this currency.

“Whether digital or not, the degree to which a government-issued digital currency (gold-backed as it is) can resist human manipulation, etc., will ultimately decide its success or failure.”

Lessons from Nigeria’s eNaira

Zimbabwe is not the first country in Africa to introduce a CBDC; the Central Bank of Nigeria issued a digital version of the Naira in October 2021: the eNaira. Despite also experiencing numerous challenges with its currency, adoption has proved to be slow.

Even shortages of new banknotes released in Nigeria which caused riots in February did not result in more people resorting to eNaira. One reason for its slow uptake is a lack of places to spend digital currency, making it far less convenient than cash.

Jonathan Dharmapalan, CEO of digital fiat currency technology provider for central banks eCurrency, discussed the lessons learned from eNaira’s shortcomings: “The ideal set-up for CBDC in Africa is the two-tiered system. The most important lesson from the eNaira experiment is that the CBDC has to work ‘seamlessly’ through existing banking and payment platforms.

“The central banks should be focused on the minting and the issuance of digital currency and leave it up to commercial banks and mobile money operators to circulate it to the public.

“In Africa, the best mechanisms to reach the broadest base of the public is through well-established mobile money operators and banks. Central banks that recognise this will leverage these private sector partners as integral to disseminating digital currency. A well-designed CBDC implementation will leverage the payments infrastructure to provide a digital, interoperable central bank-issued legal tender to stimulate financial inclusion, convenience, safety and trust in a CBDC.”

What the future of African digital currencies looks like

Andrew Latham, director of content at online financial comparison platform SuperMoney.com, explains how Zimbabwe’s past challenges with hyperinflation have not put it in an ideal position to ensure future success and adoption:

“It can be challenging to compare the adoption of Zimbabwe’s digital currency with Nigeria’s eNaira since these are two very different currencies. Zimbabwe’s gold-backed currency may seem attractive. Still, Nigeria’s eNaira has the advantage of being supported by the largest economy in Africa. It is worth noting that the launch of Zimbabwe’s gold-backed digital currency came after the introduction of physical gold coins in 2022, but this did not significantly stabilise the local currency.

“Ultimately, the success of both digital currencies will depend on trust, stability, and accessibility for their respective populations, as well as overcoming historical challenges such as Zimbabwe’s hyperinflationary past and Nigeria’s struggle with corruption and financial inclusion.”