This Cryptocurrency Is Backed By Cold, Hard Gold

Minacoin wants to combine the advantages of bitcoin with gold, and cosy up to regulators.

May 6 2014, 1:20pm
Image: Shutterstock

The problem of volatility has long plagued cryptocurrencies, to the extent that it almost seems like one of their defining features. The unexpected price swings as demand peaks and troughs are a major reason Bitcoin and its ilk find their usefulness as a currency limited, but it’s tricky to stabilise something that becomes harder to mine just as more people want to get their hands on it. 

So I was intrigued when I heard about a new cryptocurrency that aimed to solve this problem with the backing of cold, hard, analog gold. In some ways, it sounds anathema to everything digital currencies stand for—wasn’t the whole point to get away from central stores of physical money? Or could this kind of compromise between traditional valuables and new payment methods be the answer for those seeking a more reliable digital coin? Or is the whole thing just a crazy idea?

I spoke to Melvin Ng and David Gallo, founders of Mina Financial Inc. and the creators of the asset-backed “Minacoin” to find out exactly what the deal was. Gallo explained that they wanted to mix the benefits of bitcoin with the benefits of gold, to get the best of both worlds. “Although gold has a more stable value, it’s really hard to transfer,” he said. “With bitcoin, it’s easy to transfer but we’ve seen the volatility over the last year when it went from $100 to $1000, down to $400 again.”

Minacoin, which will be available from the end of this month, is backed by a stash of gold held in reserve, with the number of coins capped at 21 million (they’re pre-mined). Each coin corresponds to one milligram of real-world  gold. In a release they sent me, they explained that, “upon purchasing Mina, a client gets added as a discretionary beneficiary to an express trust, which manages a pool of gold bullion held in reserve to support the currency’s value.” So essentially, what you’re trading is kind of like electronic shares of gold, with the transactions going through the blockchain like bitcoin. Ng and Gallo will make back their investment in the gold bullion through part of a 0.8 percent fee collected monthly—and no, you’re not allowed to withdraw the gold.

In an email after our conversation, I asked if it couldn’t become problematic if the Minacoin cryptocurrency starts trading above the worth of the actual gold behind it, if it were to become really popular for instance. “Hypothetically if the price of coin goes over the price of the gold backing it, it means that there is a great demand for it and we can definitely introduce more coins at a later release,” Ng responded. “Most gold ETFs (exchange-traded funds) don't fluctuate more then 1% over the value behind it, so I doubt this will happen for Minacoin,” he added.

They haven’t yet decided exactly how they’re going to store the gold, but they assured me it would be as secure as possible. Nevertheless, having a stack of gold presents something that flies in the face of much cryptocurrency wisdom: a central point. The company was keen to emphasise that the technology behind transactions was still the same peer-to-peer, decentralised model. “The only central point is the gold, and that’s where we are really, really cautious in terms of being compliant,” said Gallo.

That’s another differentiating factor for Mina: they’re super-keen to be compliant with regulations. Of course, given the disarray around regulating cryptocurrencies right now, those regulations are largely as yet non-existent, though Mina say they use a verification standard to confirm customers’ identities, and will report any transactions over $10,000 to Canadian finance body Fintrac, as well as monitoring for suspicious activity themselves. They’re working with specialists in the area, including at well-recognised consultancy firm KPMG, to help figure things out. 

Needless to say, they’re keen to distance themselves from the more underhand, cryptoanarchic side of digital currencies. “We want to stay away from the black hat nature, if you will, of what unfortunately bitcoin has shown some of the world, but we just want to really leverage the technology that it provides and harmoniously marry that with old-world thinking,” said Ng. 

This eagerness to appeal to regulators’ good side may well have its roots in experience; before founding Mina Financial, Ng ran Canadian Bitcoin exchange CADBitcoin—which had its accounts frozen in 2013.

Ng and Gallo’s approach boils down to the same aim as most of the more business-minded bitcoiners: to make commerce more efficient. “That may sound corny, but that’s truly based on my own frustrations over the years in business,” said Gallo. “You’re scratching your head and saying, why are people paying all kinds of fees?” 

So while the idea of crypto-gold might evoke visions of pirate booty, it’s really a little more, well, boring: another attempt at a more efficient payment solution. For all the talk, I'm still a little unsure as to why you wouldn't just use bitcoin if that's your main goal. And if it's not, why not just go for gold?