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State-Backed Arbitrage: From Bond Notes to Gold-Backed Digital Tokens

Since its re-introduction nearly four years ago, the Zimbabwe Dollar has precipitously lost value against the United States Dollar. To quell this slide, the Reserve Bank of Zimbabwe (RBZ) has promulgated policies such as high-interest rates (currently 150%), introduced an auction rate system, fined businesses and informal currency traders accused of trading in the parallel market, introduced gold coins as an alternative investment to the US Dollar and have now introduced gold back digital tokens. The underlying common thread in this is the constant need for arbitrage opportunities using the state and its appendages to transfer wealth from the poor to the elite. Focusing on the gold-backed digital tokens, let us deep dive into the latest chapter of this monetary African telenovela.


In simple terms, arbitrage is an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of a price difference and generate a profit. The asset in question here is the US dollar. The US Dollar has been 30%-80% cheaper to purchase through official channels such as the RBZ and registered banks compared to the parallel market. Technically, this would not be a problem if anyone could have access to such cheap dollars. However, and expectedly, that is not the case with the RBZ seemingly having a preferred list of companies/individuals who can access cheap foreign currency.

The best example is the foreign currency auction system where the RBZ in practice has discretionary powers on which company/individual receives hard US Dollar cash. There have been reports of some stakeholders only receiving payment 6 months after bidding on the auction system. In a hyperinflationary economic environment, time is everything meaning if you are the company/individual receiving foreign currency on time, it provides ample opportunity to trade some of the foreign currency on the parallel market and earn at least 30%-80% returns.

Zimbabwe and Cryptocurrency

During the first global phase of Bitcoin adoption, Zimbabwe in some research was pegged as one of the countries most likely to adopt cryptocurrency and this was due to monetary policy incoherence and the nature of the economy where informal foreign exchange markets thrive similar to Nigeria. And there were conversations at the policy level around cryptocurrency growth which was highlighted by the Golix cryptocurrency exchange being banned from operating by RBZ, the regulatory body arguing that businesses and individuals were using cryptocurrency to externalize foreign currency. Concurrently, RBZ stated that they were looking into providing digital currency products/services, specifically, a gold-backed digital token.

A gold-backed digital token is a type of digital currency that is backed by physical gold. Essentially, for every ounce of physical gold, there is a digital equivalent. The benefit of a digital token is that digital tokens are easier to trade in comparison to physical gold because it can be done at the click of a button. However, two key questions are raised which are; ascertaining the proof of the physical gold reserves and dependence on central parties such as the RBZ and commercial banks for collateral safekeeping and auditing.

Gold Tokens and Arbitrage

The introduction of the gold-backed token is a new dimension to the state-backed arbitrage system. Other financial assets that RBZ have control over such as the Zimbabwe Dollar and gold coins are trading below the parallel market value for the former and below the global gold price for the latter providing arbitrage opportunity for those who have access and wield influence in business and politics. The tokens carry the added risk of requiring auditing and proof of physical gold availability at par with the tokens in circulation. Zimbabweans have experienced such a situation during the Bond Note era. RBZ promised that the Bond Notes would be pegged to the US Dollar, however, the Bond Notes lost credibility and then value amongst the population. There is a genuine risk that the gold-backed digital tokens because of their digital nature will eventually lose their value if the RBZ and government see the tokens as a means to raise finances without having enough gold to back their value.

The RBZ has tried to use a number of assets supposedly to shore up the Zimbabwe Dollar. However, the continued printing of the currency while these other assets are being introduced strengthens the argument that the different asset categories are not actually meant to preserve the value of the Zimbabwe Dollar or reduce demand for US Dollar, They are actually assets being used to create arbitrage opportunities that only a few elites can access essentially transferring wealth from the working masses through inflation tax.

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