Zimbabwe introduces gold-backed currency to combat inflation

Zimbabwe has a long history of battling currency instability. In an effort to finally tame inflation and create a more reliable financial system, the Reserve Bank of Zimbabwe (RBZ) has introduced a new "structured currency" called the Zimbabwe Gold (ZiG).

This initiative marks the latest attempt by the RBZ to address the country's ongoing monetary woes, following past efforts like gold-backed digital tokens and bond notes.

Governor John Mushayavanhu, in his first monetary policy statement, announced the launch of ZiG. This new currency aims to achieve stability by being backed by a combination of foreign exchange reserves and precious metals held by the central bank. This backing mechanism aims to instill confidence in the market regarding the value and stability of ZiG.

The introduction of ZiG comes after a previous attempt by the RBZ to introduce gold-backed digital tokens in 2023. However, this initiative faced criticism and ultimately failed. The RBZ hopes that ZiG, with its physical form and broader backing strategy, will be more successful.

Features of ZiG and the Transition Process

Multiple Currencies: ZiG will co-circulate with other foreign currencies within the country, creating a multi-currency system.

Denominations: The new currency will come in various denominations, catering to different financial needs.

Conversion Process: Local banks will be responsible for converting Zimbabwe dollar balances into ZiG, using the prevailing interbank exchange rates and gold prices as a guide.

Beyond Stability: ZiG and Economic Growth

The launch of ZiG is not solely focused on currency stability. The RBZ hopes that the new system will:

Boost Confidence: Increased trust in the financial system could lead to greater economic activity.

Reduce Interest Rates: A significant reduction in annual interest rates from 130% to 20% aims to make borrowing more affordable and stimulate investment.

Encourage Growth: By making borrowing cheaper, businesses will have easier access to capital, potentially fostering economic growth.

The Foundation of Stability: Reserves and Macroeconomic Fundamentals

The RBZ emphasizes that the stability of ZiG is not solely dependent on the new system itself. Strong macroeconomic fundamentals and substantial reserve assets, including foreign currency and gold, will act as a crucial safety net.

Challenges and Disruptions: The Road Ahead

Transitional Hiccups: The financial sector is experiencing disruptions as institutions adjust to accommodate ZiG. Processing of local dollar transactions is currently on hold until these adjustments are complete.

System Downtime: Several banks, including international players like South Africa's Nedbank Ltd., have encountered system downtime due to the reconfiguration necessary for handling the new currency.

Adapting to Change: Some banks can automate the conversion process, while others require additional vendor support. These varying levels of preparedness might prolong the transition period.

How has the Cryto world responded to this development?

The response from the cryptocurrency community to this development has been mixed. While Coinbase, a prominent cryptocurrency exchange, expressed confidence that any sell-off resulting from this move would likely remain contained within the crypto ecosystem and not cause major disruptions in the market, concerns persist regarding its potential impact on GBTC and the wider crypto industry.

Genesis's financial difficulties can be traced back to the aftermath of the FTX bankruptcy in late 2022, which disrupted its lending operations and put pressure on the company to repay significant locked deposits. As a result, Genesis began exploring various options, including enlisting the services of investment bank Moelis & Co., and announcing a reduction in its workforce by 30%.

The bankruptcy filing had repercussions for Genesis and raised concerns about the stability of Grayscale Bitcoin Trust. Observers in the market were particularly cautious about the possibility of liquidating over 600,000 Bitcoins associated with the Genesis bankruptcy.
Despite these challenges, the crypto lender recently reached a settlement in a lawsuit with New York Attorney General Letitia James concerning allegations related to its Earn program. The settlement aims to return assets to former Earn customers and other creditors of Genesis, pending approval by a bankruptcy judge.

Despite these challenges, U.S. dollar-based transactions remain unaffected. However, Zimbabwe's history of currency reforms, particularly the hyperinflation period of 2008, serves as a stark reminder of the complexities involved in such transitions. The success of ZiG will depend on the RBZ's ability to manage the transition smoothly and establish trust in the new system. Only time will tell if ZiG can finally usher in a period of monetary stability and economic growth for Zimbabwe.