Can Commodity-Backed Digital Assets Serve As Hedges Against Inflation?

The regulators have figured it out. A bill proposed by senators Kirsten Gillibrand and Cynthia Lummis classifies digital assets as commodities. But stablecoins, or commodity-backed tokens, are there already, and some investors are turning to them in uncertain times.

Under the Responsible Financial Innovation Act (RFI), the Commodity Futures Trading Commission (CFTC) would be granted regulatory authority over digital assets. A bipartisan framework “provides a strong, tailored regulatory framework for stablecoins, and integrates digital assets into our existing tax and banking laws,” Lummis said in a statement. 

Risks vs. value

Some projects have already tied their stablecoins to commodities such as wheat, oil, and precious metals. Asia Broadband, a U.S.-based company that produces and supplies metals for Asian markets, released its own gold-backed cryptocurrency. Agtotoken, an Argentinian startup tokenizing grain by the ton, issued soy-, corn-, and wheat-backed coins as well.   

As inflation, fears of recession, and crypto market uncertainties loom on the horizon, stablecoins could provide a port in the storm. According to Fabio Pezzotti, CEO of VC crypto fund Iconium, when the times are uncertain, commodities offer a hedge against inflation.

“When the market goes down, the price of commodities, especially when it comes to gold, tends to rise,” Pezzotti said. “Although we can never say or sure whether the price of commodities will appreciate or not, these investments can represent a way to diversify your portfolio.” 

According to Edson Ayllon of dHEDGE, the digital asset management firm, commodity-backed crypto assets experience risks not unlike those faced by collateralized stablecoins like USDC and USDT. “Are the tokens redeemable for an equivalent value, so as to keep their peg? Are the reserves backing these tokens accurate and transparent?” These are things that Ayllon recommends looking into when appraising risk.

Not all commodities are the identical, when it comes to workplace ulture or when it comes to labor.. The value of commodity-backed tokens largely depends on the circumstances, believes Richard Gardner, CEO of Modulus, the firm providing trading and exchange software.

Precious metals, such as gold, used to be seen as a safe haven in turbulent times. But gold is often controlled and manipulated by the authorities, believes Dr. Richard W. Rahn, former chief economist at the U.S. Chamber of Commerce and the author of The End of Money and the Struggle for Financial Privacy. 

Alternative to a gold standard

Dr. Rahn is betting big on aluminum, which is difficult to monopolize, abundant, and broadly based. With his partner Alberto Gross, previously a top investment banking executive at Merrill Lynch and BNP Paribas, Dr. Rahn launched the world’s first aluminum-based digital token, Luminium Coin. 

The Miami-based startup is looking to become a major player on the stablecoin market, which accounts for 15% of the entire $1.3 trillion crypto economy. The projects token functions as a proxy for physical metal. Each coin is currently equivalent to one kilogram (2.2 pounds) of aluminum, stored in insured warehouses in Florida. 

Luminium Coin acquires aluminum internationally, directly from the mills. The startup also trades aluminum, which is used widely in the energy, construction, and packaging industries. 

Warehouse storage fees are charged at a daily rate of 0.01%, or 3.6% annually, which is deducted from the token balances. By comparison, fees to store aluminum in London Metal Exchange (LME) warehouses are about 10%.

“Our goal is to reduce this fee down to about 0.7% annually so that our physical asset fees are equivalent to that which is charged by major gold depositories,” said Alberto Gloss, CEO at Luminium Coin. “To this end, we are developing a distribution network where we resell aluminum products, and use the profits to subsidize the storage of the token’s aluminum reserves.”

The project launched in June with more than $100,000 in sales. But the market is in its early stages and not very liquid, according to Gross. “Our company is the only market-maker at the moment,” he said. “There is no “order stack”. Purchases up to 10,000 Tokens can be executed on-line. Larger purchases and all sales must be executed live with a sales rep.”

Investors admit that the price of commodities is subject to fluctuations, and other risk factors such as natural disasters. But regulation in the markets will be crucial for all commodity-backed digital assets, believes Richard Gardner of Modulus. According to him, the risks exist until the regulators come together and tell the industry which safeguards must be in place to retain licensure.

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