On April 23, 2023, the Reserve Bank of Zimbabwe announced that the gold-backed digital asset will be used as legal tender in the African nation. The move is part of an effort to stabilize the country’s economy and local currency’s continued depreciation against the U.S. dollar. According to reports in local media, the move will allow those holding small amounts of Zimbabwean dollars to exchange their money for digital tokens. According to the Zimbabwean central bank, this will help them store value and hedge against currency volatility. Zimbabwe’s central bank declared:
“To expand the value-preserving instruments available in the economy, enhance divisibility of the investment instruments and widen their access and usage by the public.”
While this sounds like good news, it is important to take it with a grain of salt. Is this new gold-backed cryptocurrency, which is to become legal tender, going to be a decentralized currency or controlled by the Zimbabwean government?
The Reserve Bank of Zimbabwe has said the token will be issued on May 8, and it has invited individuals and financial institutions in the country to subscribe to its upcoming gold-backed digital token. Applications for the tokens must be for a minimum of $10 for individuals and $5,000 for financial institutions and corporations, according to the central bank’s notice. The original objective of providing an alternative investment avenue for citizens to maintain the value of their savings might expand to include payments. Thus, we can clearly see that this new gold-backed digital currency wouldn’t be decentralized as most crypto-enthusiasts would have thought. It is issued as a central bank digital currency (CBDC).
The major positive aspect of adopting this new form of currency is that it is tied to gold, which is an essential component to contain inflation. Indeed, we are all, at this point, familiar with the notorious relationship that the Zimbabwean economy has with inflation. Historically speaking, gold has always been a hedge against inflation. Thus, a gold-backed currency is supposed to keep its value stable as it is tied to the market value of gold. This would then prevent government from overspending and force government bureaucrats to spend responsibly. On that note, ordinary Zimbabweans shall not expect to experience any chronic hyperinflation (at least in theory).
Can we really trust Zimbabwe’s central bank? If it managed to crash its economy several times, then what guarantees that this time it won’t happen again? While CBDCs hold the promise of lower costs, greater efficiency, improved access to financial services, and greater transparency and accountability in financial flows and payment systems, they also introduce major risks and require a higher degree of technical and regulatory complexity.
Perhaps, the major drawback of this CBDC will be the increased surveillance of financial transactions, which could raise privacy concerns. Indeed, the Zimbabwean central bank will have absolute control over financial transactions, which reveals an infringement on individual liberty. People are free to spend their money as they wish. With the CBDC, the central bank will now determine what ordinary citizens should spend their earnings on. Another important drawback of CBDCs is the negative impact that they could have on the banking sector. Banks may face competition from CBDCs, which could lead to a decline in their profits and a reduction in the availability of credit. And lastly, CBDCs could hurt monetary policy. The ability of central banks to implement monetary policy could be affected by the use of CBDCs, which could potentially lead to increased inflation and other economic problems.
It is important to assess all the factors that CBDCs encompass before fully embracing them. We can only hope that this time, the Reserve Bank of Zimbabwe will not mismanage the Zimbabwean economy as it did in the past.