Early in May, the Reserve Bank of Zimbabwe (RBZ) introduced a digital token, backed by gold, as legal tender. Ronald Farai Mushoriwa and Nigel Panavanhu spoke to Africa Legal about concerns around this development.
“The aim is to provide an alternative store of value aside from holding foreign currency, thus stabilising the exchange rate by reducing the need to hold forex,” explained Ronald Farai Mushoriwa, partner at Mushoriwa Pasi Corporate Attorneys. “This would mop up excess liquidity from the market which often finds itself on the black market purchasing foreign currency, causing daily exchange rate movements from which the local currency has failed to defend itself. The gold-backed digital tokens will supposedly be a form of electronic money backed by Zimbabwe’s gold reserves, held by the Central Bank.”
So far the reception to the new Zimbabwe digital currency has been lukewarm, for a number of reasons.
“The digital currency has been issued on questionable legality,” noted Mushoriwa. “The RBZ claims that the instrument has been issued pursuant to a number of sections of the RBZ Act (Chapter 22:15), but none of these sections empower the RBZ to create a new currency without any legal instrument, by simply issuing a press statement. The gold backed digital currency goes far beyond what is contemplated in the Act, so there is no legal framework in Zimbabwe that supports this digital currency.”
Nigel Panavanhu, a lawyer at Mushoriwa Pasi Corporate Attorneys, says that the digital currency suffers from the same crisis of confidence as the RBZ. “The RBZ has promised that it will only issue tokens that are backed by actual gold held by it, but for over two decades, the RBZ has introduced large amounts of currency into the economy while publicly denying this fact, leading to record level hyperinflation and loss of savings and purchasing power,” he noted. “Trust in the RBZ is very low and will affect decision makers in believing that the gold backed tokens are linked to actual gold held by the RBZ.”
There also appears to be no independent verification or custody of the gold in question. “It would go a long way if the gold itself was held under a third-party custodial service or was subject to constant, independent, third-party verification by a party with access to both the gold and the register of tokens actually in circulation,” said Panavanhu.
Some are concerned that holders of this currency would be forced to redeem in local currency at a much-depressed exchange rate against the US dollar. This would defeat the idea of storing value, as the local currency continues to lose value on a daily basis.
“There has been no information about the technology on which the currency will be built and safety features built into it,” commented Mushoriwa, “which raises questions about the security of the currency. Other currencies, like the eNaira in Nigeria, are built on blockchain technology which is tried and trusted, but the Zimbabwean equivalent differs in that there is no data on what platform the currency runs on.”
One other concern is that yet another instrument of “legal tender” in Zimbabwe is confusing and may create a new rate of exchange when compared to the various other forms of currency.
“One would want to be excited about this development, but the method of introduction appears to be more out of desperation to slow the slide of the local currency just before a major election than a planned economic measure meant to bring value and convenience to the transacting public,” concluded Mushoriwa. “Only time will tell how effective this currency will be.”
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