A Gold Backed Cryptocurrency? Not So Fast

A recent Yahoo Finance press release by NoFiatCoin claims that a new gold backed cryptocurrency has been created that can act as an alternative to bitcoin.  The article reads like a news article, but it is actually a self-promotional advertisement written by NoFiatCoin.

The article reads, “Traded on the Ripple Network, this next generation cryptocurrency released by NoFiatCoin | XNF is the first coin in the digital currency market to be backed by precious metals. The coin was released on the 6th of January and saw its value rise almost 50% to $2.10 in just one week.”

The article goes on to state that, “NoFiatCoin wants to avoid problems associated with mining: waste of computing power, energy and the possibility of a mining pool taking control of the market by acquiring 51% of all available mining capacity. Therefore XNF, like XRP (currency of the Ripple Network) are pre-mined and can be directly obtained on the Ripple Network or through XNF Exchanges.”

The XNF framework isn’t really a true cryptocurrency.  It can’t be. The article notes that the XNF currency is “pre-mined,” which means there must be a singular issuing body that prints up the coins and is holding them – and that issuing body is obviously NoFiatCoin.  NoFiatCoin claims that no more than 25 million XNFs will ever be created, but I’m assuming we have to put trust in NoFiatCoin to adhere to that assertion.  The benefit of bitcoin is that there is no trust issues in regards to quantity of the money supply because the currency limits are hard limits imposed by the cryptography that makes the system work.

NoFiatCoin says that only a 1/3rd of XNFs are backed by bullion and that the market will determine the price for an XNF.  To me, this doesn’t make much sense.  This means an XNF does not represent a fixed weight of gold.  Further, NoFiatCoin says redemption of XNFs for bullion requires a minimum of $3000 worth of XNFs at current market prices.

If XNFs were actually a “gold backed” currency, each XNF would have to represent a fixed unit of weight.  For example, they could set an XNF to be worth .001 ounces of gold, and if you saved up 1000 XNFs, then you could always exchange them with NoFiatCoin for an ounce of bullion.  Of course, under this system, it would be impossible to have a fixed limit of currency creation, and there would have to be a way to take XNFs out of circulation once they were redeemed for physical specie.

Further, if XNFs were a real gold backed currency, we would have to trust NoFiatCoin to maintain an accurate accounting of its gold reserves vs. its issuance of XNFs.  There’s nothing that would physically prevent NoFiatCoin from issuing XNFs without actually having the gold to back them for redemption.  This is how fractional reserve banking first came about.  We can see that there are multiple trust issues that come into play when trying to tie a digital currency to physical bullion.

Basically I don’t see any difference between NoFiatCoin offering up bullion for bitcoins at current market prices or them offering up bullion for XNFs at current market prices, other than the fact NoFiatCoin holds all of the initial XNFs – which sounds like a pretty sweet deal for NoFiatCoin.  That said, the currency can work, because the supply is limited and it retains most of the same value properties that bitcoin does.  I just don’t understand why anyone would rather use this currency over bitcoins, which don’t have the trust issues that XNFs do, nor is their issuance entirely controlled by a singular third party.

By NoFiatCoin’s reasoning, bitcoins must also be a gold backed currency, because I can directly exchange bitcoins for gold bullion right now.  Since I can exchange bitcoins for bullion at current market rates, there’s no difference between bitcoins and XNFs, at least in terms of their “gold backing.”

  • Christian

    While Bitcoin is a great software achievement I don’t put my trust in it either. The 51% attack could wipe it out. GHash is getting close to that now in fact. I think a new crypto that is immune to the 51% attack could displace Bitcoin at some point. As for NoFiatCoin goes if I can’t get real money for each coin why would I want it over a real coin? Computers really are only as safe as the next hack that comes along.

    • Bitcoin is presently the largest distributed computing network in the world. A 51% attack is so remote that I put the odds of it happening at being less than that of the dollar imploding. Critics will cite mining pools as being potential sources of such an attack, but that’s only because they don’t understand how mining pools work.

      There’s simply no way 51% of bitcoin miners are going to voluntarily run subversive mining software, because ultimately they know this will destroy the value of the existing currency they already control. It just doesn’t make sense for them to do so. In order for a mining pool to pose a threat, everyone in the pool would have to agree to run the subversive mining software.

      As for why you would want to hold bitcoins over gold – last time I checked, you can’t ram gold down a transmission wire. Try and buy something online with bullion once. Let me know how far you get.

      • Christian

        Yeah your going to have a hard time buying things online with metals.

        • arf55

          Yep, you may soon have trouble buying ‘anything’ with real money. If all transactions end up being computer generated and your bank account dependent on programmers then ‘they’ will have total control over your ability to buy or sell. Now that is what I would call ‘life or death’ total control!

          • Dimitri Andre

            Not unless the software is open source

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  • Content Soul

    I agree with your/NoFiatCoin thoughts that a lot of energy and computing power is being wasted in mining. If energy used+ hardware investment for mining cryptos is calculated today, I am sure it would be more worth than the total cryptos in the market. My God, So much energy and efforts are getting wasted in mining. A waste of resources.

    Another point I would like to make about NoFiatCoin is that- you said XNF should be fixed to a particular amount of gold, silver. I see no logic here and this is just not practical. I think its just fine to get same worth of gold to the actual/current value of XNF in market.

    I think people should not expect XNF to be just like bitcoin since it works on a complete different model (Centralized) like ripple. So there is no point complaining about its function. It is just like that.

    • Right, but they are are claiming the currency is backed by gold, but it is no more backed by gold than bitcoin is. How is it any different if I can buy gold with bitcoin at market rates or gold with XNF at market rates? This isn’t a “gold backed” currency because it is not directly convertible for a fixed weight of gold.

      Further, I wouldn’t consider the resources put into bitcoin mining to be a waste. Not only is the mining necessary to create new coins, but it is also necessary to confirm payment transactions on the block chain. No energy is being pointlessly spent.

      The bitcoin system architecture is what prevents arbitrary inflation of the money supply. Unless I’m somehow mistaken, with XNFs, trust has to be placed in the developers not to inflate the money supply at some later date.

  • Ken Griffith

    Good analysis, Michael. The bottom line is – what’s the contract underlying the value of the XNF? What is the governance in place to enforce that contract?

  • O

    One misconception you created in the above article is that BitCoin could be a gold backed currency because you can purchase gold with BitCoins. This does not make it a gold backed currency, as you can do the same with the US Dollar. A gold backed currency is one that stores reserves to hold value to issued currency.

    I applaud NoFiatCoin’s efforts in creating something that will hold value. But at the same time, they will suffer the same false accusations that e-Gold did and eventually be shut down by the US Government. I’ll shorten my opinion on that to – the US Government sees a threat, they will not hesitate to shut you down and make false accusations.

    In general, I see the world eventually shifting dependancies off of government issued currency to a non-regulated currency like BitCoin. I, myself, have plans to create a world currency backed by gold. No more inflation. No more exchanges. No more federal reserve holding poor countries hostage over debt.

    If anyone is interested in helping fund the start up of this project, contact me at admin at opuscoin dot com

    • O

      I will also add that once the coin is exchanged for physical gold with NoFiatCoin, they will more than likely use that money to purchase new gold to store in its place – thus this does not diminish the value of NoFiatCoin’s currency.

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  • David

    I have found another site which looks promising as a gold backed crypto.
    http://www.G8Coin.com these guys are actually gold miners i think, but have started this site up

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    If I was a retailer and I needed to decide between Bitcoin or a digital coin backed by gold, I would have to be a nutcase to choose Bitcoin.