Digital Gold Creating Yield for Treasurers
By Jai Bifulco, Chief Commercial Officer, Kinesis
When the first ever government-backed, sharia-compliant, gold-based financial infrastructure was launched in Indonesia this month, it signalled new ways of thinking about corporate payments and yield generation. TMI decided to find out more.
Payments systems come and go, with various capabilities attributed to each. But when one solution is touted as a “transformation of an outdated monetary system”, the pitch rises a notch or two.
The soft launch of Indonesia’s physical gold-based digital sharia platform PosGO Syariah marks one of the largest public-private partnerships ever. It is a multi-partnership effort between the country’s government, its state-owned postal service (PTPos), the state-owned commodity clearing house (KBI), two national commodity exchanges (Jakarta Futures Exchange and Indonesia Commodity & Derivatives Exchange), a leading Asian bank (CIMB), a domestic financial technologies firm (PT Bullion Ecosystem International), Liechtenstein-based blockchain provider Kinesis and its sister company, the Australian public physical bullion exchange and vault facility provider, Allocated Bullion Exchange (ABX).
The blockchain-enabled payments platform is live and is being rolled out initially to 45,000 PTPos employees. A nationwide launch is scheduled to begin this month. Beyond PTPos, the system heralds an interesting alternative payments solution and yield generation tool for a host of stakeholders, including corporate treasurers, says Kinesis Chief Commercial Officer, Jai Bifulco.
As companies and individuals increasingly explore the world beyond traditional fiat currencies, Bifulco believes a digital monetary system based on a 1:1 allocation of physical gold is a step in the right direction. The solution operates without borders and foreign exchange (FX) fees, and payments arrive settled with redeemability into fiat or even physical gold. The solution also offers to registered users who have deposited gold a monthly yield that Bifulco believes outstrips that of normal short-term investments.
PosGo Syariah is the first Islamic mobile ecosystem business in Indonesia. A regulatory framework that accounts for the digitalisation of physical gold was carved out for this project, the government having deemed it one of national importance.
Following certification by the National Sharia Council that the processes deployed are sharia-compliant (there is no debt or interest component as it is a purely transaction-based model), the country’s predominantly Islamic population is now able to save and transact in real time with the tokens, either online or via the associated mobile app.
The system enables any citizen to obtain secure legal title to a currency equivalent in allocated physical bullion. In its tokenised form, stored in an e-wallet, the gold’s owner can transfer it anywhere in the world in seconds. With all transfers of gold and fiat balances supported by Kinesis’ blockchain technology, the system also means Indonesia’s regulatory agencies will have full know your customer/anti money-laundering (KYC/AML) oversight.
PosGo Syariah’s consumer benefits are largely centred on reducing costs for migrant worker remittances. Converting their foreign currency wages into Indonesian rupiah to send overseas has proven “an expensive and cumbersome process”, says Bifulco. “Gold allows for universal valuation across borders. There is no FX component.” The system also brings approved financial services to unbanked citizens via the country’s easily accessible post offices. But, he adds, the process underpinning the system presents opportunities for corporates too.
With ABX providing secure vaulting locations for physical precious metals around the world, Kinesis can digitally connect the value of user gold deposits to any denominated currency and put it onto the blockchain.
Gold is a particularly stable commodity, and blockchain is acknowledged as an efficient and secure medium of exchange, says Bifulco. The irrefutable digital connection between physical gold and its digital representation means value can be exchanged cheaply and rapidly from and to anywhere in the world. But there is more, he says.
As a transaction-based process provider, Kinesis charges a fee for each instruction – much less than the established remittance service provides, according to Bifulco. From its revenues, the system automatically places 52.5% in a fee pool. At month-end, the accumulation is distributed pro rata to all participants. This presents a yield opportunity which, because it is based on transaction numbers, simultaneously incentivises system use.
With the value of fiat currencies having proved somewhat volatile in recent times, the erosion of value by inflation remains a concern and a challenge for treasurers. One of the arguments for the use of Bitcoin (as the most prominent digital currency) is that it can provide a means of offsetting this cost of carry by generating greater yields than most short-term investments currently do.
Bifulco is a proponent of the value of cryptocurrency, believing that although still in its infancy, it bears the important message that “value can be used as a medium of exchange without it being a government-issued currency”. This message is starting to reach even quite conservative investors, but crypto carries risk.
The concept applied by Kinesis is that by leveraging the stability of gold, digitising its value, and then incentivising its use with revenue share, gold’s value is put to work. It is quite the opposite of what normally happens with it but, explains Bifulco, “this creates a monetary system that starts to drive positive growth and wealth that combats inflation”.
This, he adds, places the Kinesis system somewhere between fiat currency at one end of the spectrum, and crypto at the other, “because we’re offering a stable store of value, an efficient medium of exchange, and a source of yield”.
Every business has regular outgoings such as salaries and utility bills. By moving some corporate cash into physical gold, and then connecting the business digitally into the Kinesis system to enable tokenisation of that holding, a business can begin paying some of those outgoings through the system, each transaction helping to generate yield.
Based on Kinesis’ trade volumes for Q1 2021, Bifulco says a holder of just 1 gram of gold (current value around £41) could make up to 10% per annum based on current volumes. Of course, Kinesis needs to ensure user and transaction numbers are aligned with the onboarding of gold value (effectively the system’s market capitalisation) to ensure share value remains attractive. However, he notes, “while it can go higher or drop, there’s always a greater-than-zero yield”.
Naturally there will be a process of due diligence for any business exploring this system, certainly in terms of accounting and taxation treatment of gold holdings. In the UK, for example, bullion bars are subject to capital gains tax. In accounting terms, International Financial Reporting Standards (IFRS) state that “gold is a commodity, not a financial instrument, and thus should be accounted for at the lower of cost and net realisable value”.
These rules will vary between jurisdictions and Bifulco urges individual businesses to assess their own situation before making a judgment. However, he states, “there may be some costs, but our internal studies have shown that it always works out with a positive”.
With the prospect of cheap transactions, no FX fees, instant settlement, stability, and a potentially decent yield, gold may have just added to its already attractive properties.