What Are Asset-Backed Currencies and Why Do We Need Them? (2024)

Until the early 20th century, most countries used the gold standard as a means of managing the value of national currencies. Coins and paper notes were minted according to the amount of the gold held in reserve. However, the economic upheaval of the First World War put an end to the use of the gold standard across the US and much of Europe. Switzerland was among the last countries to abandon it in 1999. Now, most countries use the fiat system of money, where currencies are issued by central banks.

Fast forward to the 21st century, and the emergence of blockchain. Amid the ongoing volatility of the cryptocurrency markets, stablecoins have emerged as a popular digital asset class. Asset-backed currencies such as TrustToken’s TrueUSD or Paxos’ Pax Standard have their value guaranteed by reserves of US dollars, providing digital asset investors the option of easily converting their holdings into a more stable store of value.

However, critics of stablecoins make a valid point. If one of the drawbacks of Bitcoin is that it’s not backed by any underlying asset, why create a stable coin that’s backed by a currency such as USD, which also isn’t backed by a physical asset?

Yet the emergence of blockchain technology offers infinite opportunities in the field of asset-backed currencies. With blockchain, it’s possible for the gold standard to make a resurgence independently of any government or central bank. In principle, any entity holding reserves of real gold can issue currency tokens representing those reserves. If we can do this with gold, then it’s certainly possible to issue digital tokens as a currency backed by other metals such as silver, copper, or nickel. Taking it further, asset-backed currencies could also cover other assets such as gemstones or commodities like oil and gas.

Asset-backed currencies offer a more globally stable long-term store of value than fiat currencies or stablecoins. A kilogram of copper, or a barrel of oil, or a one-carat diamond, all have a value set by the economic principles of supply and demand. Their value cannot be manipulated by any central authority like a government or financial institution. Global markets dictate the worth of asset-backed currencies, regardless of the political climate in the country or region.

For a country that may be rich in assets but with a low-value national currency, asset-backed currencies offer enormous potential. One of the most well-cited examples to date comes from Venezuela, which issued the Petro, an oil-backed currency that was supposed to help the country out of its economic woes. It’s been mostly unsuccessful, due to a lack of transparency over the underlying reserves and the ongoing political conflict in Venezuela resulting in US sanctions.

However, the Venezuelan experiment has spurred others into exploring the possibility of launching their own asset-backed currencies. After all, oil remains the most exported product in the world. Russia is reportedly looking into different options, including its own oil-backed currency and a gold-backed currency. These initiatives could help navigate sanctions and help fight US influence over the markets. The nation of Kyrgyzstan has also previously stated its intention to launch an asset-backed currency against reserves of gold.

Assuming that governments can learn from the mistakes made by Venezuela’s Nicolas Maduro in launching the Petro, imagine the possibilities. Many of the world’s poorest countries are rich in assets — think the diamond-producing countries in Africa. If these countries can start to realize the value of their natural assets, it could help to reduce or even eliminate poverty.

While governments may take some time to recognize the benefits of asset-backed currencies, there are plenty of examples where startups and financial institutions are already realizing the opportunities.

Paxos, the regulated financial institution which has issued the Pax Standard stablecoin will soon launch its own gold-backed currency. It doesn’t plan to stop there either — according to Fortune, the company wants to take “any kind of asset and put it into the blockchain.”

Another project, called Lode, has a similar initiative but with silver-backed tokens called AGX. The project hopes that these tokens can become a means of enabling commercial transactions in the same way as physical silver coins.

A Swiss company called Tiberius Coin has previously launched an initiative for metal-backed currencies, in a move to allow investors to participate in the growing technology market which relies on conductive metals. Now, Russia’s richest man, Vladimir Potanin, intends to follow suit. He has announced his intention to launch a currency backed by palladium, which is widely used in the automotive industry to make catalytic converters.

Perhaps inspired by Maduro’s efforts, Petrodollars is an oil-backed currency that operates in compliance with US regulations. Each token is backed by 0.7 reserve barrels of crude oil or natural gas equivalent.

Finally, diamond-backed currencies have also been gaining ground. One challenge with diamonds compared to other assets is that there is no standard unit — each diamond can vary in weight and quality. A company called Diamond Standard believes it has solved this problem by grouping individual stones into standardized units, which are then tokenized.

Given that the monetary systems of the world depended on asset-backed currencies for thousands of years before the 20th century, it seems hardly surprising that the advent of blockchain has precipitated a resurgence. Once central banks and governments overcome their apprehension towards the new technology, it will only be a matter of time before they start to realize the vast potential for asset-backed currencies to bring new value to national economies.

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