The new stablecoin combines the perceived strength and stability of a government-issued, gold-backed token, with the speed and convenience of digital currency, potentially reducing friction for global remittances which are an important part of the Kyrgyzstan economy.
The small Central Asian nation of Kyrgyzstan has launched its own US dollar-pegged stablecoin, backed not by US dollars or US Treasuries, but by physical gold.
The new stablecoin, known as USDKG, initially launched on Tron with an issuance of 50 million tokens, valued at approximately US$50 million (AU$75.7m). There are also plans to expand USDKG to other networks, most notably Ethereum.
According to the operator of the project, a company known as Gold Dollar, USDKG is issued by OJSC Virtual Asset Issuer, a fully state-owned entity overseen by the Kyrgyzstan Ministry of Finance. Day-to-day operation of the stablecoin, including management of the gold reserves, is handled by Gold Dollar under contract to the Kyrgyzstan government.
According to Gold Dollar, this separation of issuance and operations “provides state-level oversight without political influence in operational decisions and helps align the project with international best practices.”
Gold Dollar said there were plans to expand USDKG’s issuance to US$500 million (AU$757.9m) in the project’s next phase, with an ultimate target of US$2 billion (AU$3b).
The smart contracts used by USDKG have undergone review by Consensys Diligence, giving users some additional confidence the stablecoin is safe to use.
There had been some doubt about whether the project truly held the US$50 million in gold reserves they claimed was backing the stablecoin. But the project announced December 16 that an independent audit of their reserves, including a physical inspection, has been completed by international accounting network, Kreston Global. Kreston also verified that the project has control of the official Ethereum and Tron smart contract wallets used for USDKG issuance.
USDKG Model May be an Evolution of Stablecoins
While asset-backed tokens have been around for a while — think PAX Gold and Tether Gold — USDKG is fundamentally different. Tokens like Pax and Tether Gold represent ownership of actual physical gold, whereas USDKG is a stablecoin, pegged to the US dollar, which is backed by gold.
Holders of the USDKG don’t own any physical gold. They hold a token that (hopefully) can be used interchangeably with US dollars.
USDKG is essentially a hybrid between asset tokens like PAX Gold and regular stablecoins. It maintains the US dollar as the familiar unit of account while leveraging the perceived stability of gold-based collateral and a state-based issuer.
This model may be an effective solution for an emerging economy such as Kyrgyzstan, which relies heavily on remittances from abroad. Government backing and solid collateral reserves may provide the confidence needed for people to actually use the stablecoin, potentially reducing the friction involved in sending remittances across national borders and thereby boosting the national economy.
In explaining why the gold-backed, state-issued model was chosen for USDKG, Gold Dollar said that the combination “introduces a model of measurable stability uncommon in the current stablecoin landscape.” It added that “the state-backed structure provides a clear regulatory framework built on accountability and public oversight.”
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