Paxos Launching (Yet Another) Gold-Backed Cryptocurrency

In a recent interview, Paxos CEO Chad Cascarilla explained how his company is going to leverage its position in the fintech industry and status as a financial institution to acquire the gold used to back its asset — ensuring that the supply always matches the amount held in reserves. This will be the company’s second entry into the asset-backed digital case, having launched its Paxos Standard cryptocurrency (PAX) stablecoin just last year. PAX was the world’s first regulated stablecoin based on Ethereum (ETH) and has its value pegged to the US dollar, similar to the Tether (USDT) stablecoin.

Me Too!

The idea of launching a digital currency that is pegged to physical gold is not a new one. Many projects have already tried this and the great majority have failed to achieve significant usage. E-Gold, Royal Mint Gold, NoFiatCoin, Novem, GoldX, OneGram, GoldMint, CURRENSEE, GoldBackedCoin, CryptoGold, and INNCoin are just some of the projects that have claimed their digital asset is backed by physical gold, to some degree. Many of these projects, perhaps erroneously, make the assumption that a digital asset can fully represent an asset located in the real world. As such, the digital asset should be approximately as desirable as the asset itself. When it comes to Paxos’ offering, there remain numerous questions, including:

• How will it solve the convertibility issue of its gold-backed assets?
• Will the stablecoin have a fixed or uncapped total supply?
• Will the gold will be physically present and stored within the United States? How would this affect international redemption rights?

Besides the myriad unanswered questions, it still remains to be seen whether Paxos’ new stablecoin can add value for either cryptocurrency users or precious metal investors. So far, few projects have been able to substantiate their claims that they provide improved utility or benefit over other cryptocurrencies. Even fewer have been able to independently verify their gold reserves. As of yet, no gold-backed cryptocurrency has managed to demonstrate technology that is verifiably transparent while allowing easy redemption — similar to the way Tether (USDT) can be redeemed for USD on its online trading platform. Until these issues are resolved, we find it difficult to believe any gold-backed stablecoin will gain much traction.

Will Paxos Be Different?

That being said, Paxos does benefit from the trust it has already built around its USD stablecoin. This may help it avoid one of the major challenges associated with launching a new cryptocurrency — earning the trust of the community. Despite this, there are significant challenges in linking a real-world physical asset to a blockchain-enabled ecosystem where every transaction is logged. Whether Paxos has managed to solve this logistics problem remains to be seen. If Paxos, like all those before it, doesn’t provide a way to irrefutably track the deposits and movements of these real-world assets, then users will be forced to put their faith and trust in the company while hoping it will not use reserves for other purposes or, worse yet, operate a fractional reserve without telling anybody. Paxos does enjoy some privileges that are similar to those received by a bank. For one, it manages a trust company charter — allowing it to hold and maintain custody over mainstream financial assets. Also, being based out of New York, it is directly regulated by the New York State Department of Financial Services (NYSDFS). In some cases, precious metal trading companies may be subject to the US Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) guidelines. However, for the most part, metal products are largely out of the jurisdictional purview of both the SEC and the CFTC. Because of this, how Paxos’ gold-backed cryptocurrency would be treated under NYSDFS guidelines remains to be seen. Still, if Paxos does manage to bring a regulated gold-backed cryptocurrency to the table, we imagine it will cause quite a stir. What is your opinion on gold-backed cryptocurrencies? What would it take for you to consider investing in a gold-backed cryptocurrency? Let us know your thoughts in the comments below!