US Dollar Pegged Stablecoin: USDVault and the History of Money

by | Jun 22, 2018

Global Reserve Currencies and a history of being backed by gold:

How do you measure your net worth? In Bitcoin? In ounces of gold? No matter how your assets are distributed, it’s almost certain that you use a national currency as a unit of account. And there’s a good chance that currency is the US Dollar.

The US Dollar is simply the latest in a long line of currencies that have served as a common medium of exchange. Going back to the dawn of civilization, before nations and modern currencies were conceived, the earliest trade took place in the form of bartering. Soon, the use of commodities (such as grain) or other durable materials (seashells, spices, metal ingots, etc) emerged as a medium of exchange. While not all of these materials are particularly useful – one cannot eat metal or seashells – they became commonly accepted in different parts of the world as a store of value.

By the first millennium BC, however, metal coins made of gold, silver, or copper became the preferred medium for trade. Metal coins had a number of advantages over other commodity money: they were generally a standardized size or weight and could be divided, facilitating a price system for trade; they were durable and would hold stable value over time, and could not be easily counterfeited, and were thus widely accepted as a medium of exchange.

Many civilizations minted their own coins, but a few of the most common and reliable gold and silver coins became common in trade across borders. In succession, currencies like the Greek drachma, Roman denarius, Byzantine bezant, and Arab dinar were internationally accepted for centuries at a time. Later, coins such as Venetian ducats and Dutch guilders became the global “reserve currency” at times, as these nations successively dominated international trade. Even in East Asia, coins produced in Europe became widely accepted in trade as they were sent east to be exchanged for spices and goods.

We are still living with the legacy of early currencies: the words dirham and dinar (derived from the Greek drachma and Roman denarius, respectively) are still used in multiple countries; the currency of Ghana – the Cedi – is derived from the Akan word for cowrie shell.

Fiat currencies emerge:

Paper money has existed for over a thousand years, often originating as a “deposit ticket” that could be redeemed for commodities, or later, metallic currency. In more modern times, national governments issued gold and silver certificates that were freely convertible into gold and silver coins. By the 20th century, a modern system of central banks and national currencies based on a gold standard had emerged. In other words, each national currency was still based on a specific weight of gold, and paper notes used for everyday commerce could still be converted into gold.

Over time, however, many governments have tried to create their own money when gold was in high demand or short supply. During World War I and World War II, for example, virtually all governments suspended the convertibility of their national currencies into gold or silver in an effort to finance war efforts. Many countries infamously printed so much paper money that it became worthless.

Today, no national currency is based on a gold standard. All modern currencies are “fiat” money, having value not because they can be converted to gold or anything else, but simply because they have been declared legal tender by their issuing government (“fiat” is Latin for “let it be done,” often used to begin proclamations by European governments in Medieval times).

The United States dollar largely replaced the British pound as the world’s reserve currency after World War II. The US dollar has fluctuated on and off a metallic standard throughout its history: it originated as a bimetallic (i.e. gold and silver) standard in 1792, but convertibility was suspended during the Civil War, restored in 1879, changed to a gold-only standard in 1900, reduced in value in 1934, and finally suspended altogether in 1971. So while it’s true that the US Dollar is no longer redeemable in gold, it still retains many of the properties we associate with a stable money supply: stability, divisibility, and widespread acceptance.

Today, the US Dollar still makes up more than 60% of central bank foreign exchange reserves. It is accepted as an alternative currency in many unstable economies, and even some developed economies (Hong Kong, Saudi Arabia, etc.) peg the value of their own currency to the US Dollar. Simply put, individuals, large companies, and central banks alike use the US Dollar to measure their gains and losses. So while you can’t redeem your dollars for gold, the US Dollar is still considered the global reserve currency in the same way gold-backed currencies were in previous eras.

The Rise of Cryptocurrency: Improved technology, with monetary challenges:

The Global Financial Crisis and concerns over instability in the traditional banking system led to the rise of cryptocurrencies since 2009. Cryptocurrencies quickly became attractive to traders as a means to transact outside of the banking system and to speculators as the value of many cryptocurrencies fluctuated dramatically. Today, there are over a thousand competing cryptocurrencies that collectively make up a small but growing percentage of global assets.

However, most of these cryptocurrencies are not easily convertible into USD (or any other fiat currency), do not yet function as a unit of account in their own right, and are not easy to use, or widely accepted, for everyday transactions. Converting cryptocurrencies into fiat currencies is generally possible but often results in a taxable event, is time-consuming, and has jurisdiction-specific legal and regulatory implications.

US Dollar Pegged Stablecoin, Backed By Gold:

“Stablecoins” are an even more recent innovation in the cryptocurrency space. They are cryptocurrencies that maintain a stable value vis-a-vis a commodity or fiat currency, thus allowing consumers, traders and institutional investors to transact or invest in cryptocurrencies without the worry and fear of price volatility, and thus acting as a medium of exchange within the cryptocurrency space.

Vault’s USDVault token is a new stable cryptocurrency that provides a store of value by being backed by gold and pegged 1:1 to the US dollar. This peg to the US dollar is achieved with sophisticated gold hedging program and a hard asset reserve of physical gold held in Switzerland (a country well-known for its stable banking industry). While other stablecoins have been attempted, all lack the combined benefit of being pegged to the global reserve currency while being backed by and redeemable for the world’s most trusted store of value: Gold Bullion.

A reliable stablecoin like USDVault is needed to bridge the gap between the crypto space and the traditional financial system. Allowing simple, legal, and reliable convertibility into a US Dollar-pegged instrument makes all cryptocurrency a much more attractive investment for consumers, traders and institutional investors, as it can be traded quickly, safely, and legally. Vault has the potential to transform the crypto space by stabilizing it and attracting a larger percentage of global assets to cryptocurrencies while maintaining cryptocurrencies’ separation from the banking system and the capacity for new innovations.