Kinesis – a goldbug stablecoin
Whoa. The PP site put this second discussion post of mine in place of my daily commentary! Today’s commentary is located here: https://www.peakprosperity.com/discussion/115006/pm-daily-market-commentary-4292019
Sorry about that.
Visitors to King World News will know about the Kinesis coin – they pump it there every week, without fail. I poked around to see how it worked. Here is what I found:
The coins people will use are called KAU, and KAG. Each KAU is backed by 1 gram of gold, while each KAG is backed by 10 grams of silver. The backing seems legitimate. There appears to be no float, or warehouse receipt scheme. I mean, I didn’t do a deep dive, but on the surface it seems legit. [Perhaps our other luminaries here can say something about whether or not ABX (the gold exchange company behind Kinesis) is a reputable organization]
Kinesis, like other stablecoins, are not peer-to-peer blockchains – they’re private blockchains run by a company. So there are no “miners”, no block rewards, etc. You depend on the company’s deployment of servers for the network to function. The blockchain variant is based on Stellar, for those who know what that is. Supposedly, the blockchain tech was selected for high transaction volumes. Confirmation of a TX happens in a few seconds. There is a wallet as with other coins – keys, wallet words, etc, where you hold your coins. When you transfer coins to others, someone pays an 0.45% TX fee. I’m not clear on who pays – sender or receiver.
KAU/KAG is created (“minted”) by people depositing cash with Kinesis, then executing a buy in the “Kinesis Wholesale” market – which (eventually) triggers an actual purchase of gold or silver, a deposit of that physical gold into the Kinesis vault, and a credit of KAU/KAG to the minter’s wallet. It’s basically buying physical gold or silver. Minters can also deposit physical gold, but that appears to be practical just for those who have large gold deposits already in good delivery form.
When you spend KAU/KAG that you’ve minted, you get a reward – collectively, minters get 5% of the aggregate fees generated by all KAU/KAG transactions that they spend into circulation. For a minter, think of this like a “rewards” credit card. You get a yield by spending KAU/KAG into circulation – paid for by everyone else in the system who has to fork over the 0.45% TX fee to receive KAG. As long as “your” KAU remains in circulation, you get that share of the transaction fees.
How does KAU/KAG get removed from circulation? Any holder of KAU/KAG can present their KAU/KAG and request delivery of the metal – either if you receive it in a transaction, or if you’ve “minted” it but not spent it.
Holders of KAU/KAG also receive a pro rata share of 15% of the aggregate transaction fees collected by the network.
Account holders can receive either a debit or credit card that will allow them to spend KAU/KAG anywhere that VISA is accepted.
There are no storage fees charged by Kinesis, nor are there fees charged for minting or redemption – although there might be (probably is?) a spread between the KAU/KAG price offered in the wholesale market, and the current spot price of the metal itself. How large that spread is, I have no idea. If its too large, that would be a real turn-off for me.
Will this work? Well, it all depends on getting people to pay that 0.45% TX fee.
How does the 0.45% TX fee compare to other options?
For sending coins to your friends, consider: send $1000 using bitcoin, you pay $0.79. Send $1000 with Zelle? Free (although there’s a $5k limit). ACH: Free (although a 2-day delay). Send $1000 in KAU: that’s $4.50. Ouch. It does get there in 2 seconds though, so there is that.
For larger international transfers: that’s a bit harder. Will your foreign bank accept KAU the same way it accepts a wire from a US bank? I’ve paid about 30 bp to send a large amount internationally including the spread – Kinesis is 45 bp, and that’s without the spread. I’m guessing a bank wire will be cheaper, although its much more painful since you have to run down to your bank and spend an hour executing the transfer, and it takes a day, versus a few seconds for KAU which you can do at home.
Paying for things using your credit card? KAU and USD are probably identical – at least for you. I’m not sure what it looks like at the merchant’s end.
As a “stablecoin” for crypto holders, it is much more reliable than Tether and the like – its backed by real physical gold. You don’t get much better than that. Of course it fluctuates with the value of gold – but USD fluctuates too. And you actually get a yield by holding KAU – you don’t get that with Tether.
And if there is ever a “problem” with obtaining physical gold, KAU could trade at a substantial premium to the paper spot market. That’s one of those “failure to deliver” lottery tickets that us goldbugs dream about at night, and Kinesis would give us that.
So for interpersonal use, KAU is really expensive. Buying things: its normal. Wiring? Its much more convenient, and faster, but likely more expensive. And for gold/silver depositors, it seems like a total win – although that really depends on how wide the spread of KAU vs physical gold is when you “mint”.
Last issue: taxes. Although I’m not a tax expert, if you used a Kinesis debit card for daily transactions, and “minted” KAU with your monthly paycheck, it seems possible that the IRS would want you to keep track of each month’s KAU/USD “minting price” when you deposited your paycheck, and each transaction’s “spending price” of KAU/USD, and calculate your taxable gain or loss on each transaction. If this is true – personally, my head would explode if I had to do all that work, unless the company came up with some kind of assist. The company could live or die on this one detail alone. This is why I’m thinking that the debit card, while cute, might not be all that practical.
I think its something to watch. Having true digital gold – it could be a revolution, paid for by TX fees. If it is accepted for transactions, sellers are already paying Paypal 2.9%, and so 0.45% looks good by comparison. Plus you get paid for your KAU deposits. That’s nice too – especially for those used to paying storage fees.
I think it all depends on acceptance – what the velocity of money is through the Kinesis system – how wide that spread is at minting, and how painful the tax accounting is at the consumer end.
Oh, and FWIW, there’s also a token involved – no gold and silver, just a Kinesis altcoin whose initial sale funds the startup costs of Kinesis-the-corporation, in exchange for a cut of those TX fees for as long as you own the token. It is called KVT. The KVT as a group gets a 20% slice of all the TX fees as long as the KVT exists – a KVT is an ERC-20 token. Once the KVT’s are traded on an exchange, if Kinesis does really well, then the yield based on TX fees could drive KVT’s price higher. Since I haven’t looked at what the implied yield is based on projected money velocity, I have no idea if the current KVT ITO price is a good value or not.
FD: I didn’t get any sort of fee for this post, and I have no current position in KAU, KAG, or KVM. Although Kinesis does offer a reward for those who generate referrals, I’m not participating. It just seems a bit tacky. You guys might think I’ve become a pumper and that wouldn’t do. Here’s where you sign up to become a pumper (excuse me I mean “brand ambassador”) and you can get a 3% slice of all the leads you bring in: https://kinesis.money/en/referral-program-brand-ambassador/
Anyhow, here’s the link:
Kinesis is basically a crypto/blockchain extension of ABX, which is an Australian bullion dealer that has been active here for a number of years.
There are a few other gold tokens which have transaction fee sharing, but I think that business model is flawed for a number of reasons.
First, Goldmoney under Jame Turk (pre takeover by Bitgold) had gold P2P transfers but they actually dropped this in 2011 https://goldchat.blogspot.com/2011/12/goldmoney-is-no-longer-gold-money.html due to “our customers’ use of the metal payments and currency exchange services is not significant”. Even though Goldmoney added this functionality back, I think that was more driven by Bitgold founders’ philosophical leanings than it being a big revenue earner, plus it is nice marketing angle.
I agree with my former boss, Keith of Monetary Metals, that people do not spend gold because people spend their income, not their savings. You earn fiat, you spend it on things you need and if you have anything left, you save it. Gold is in the saving part, as no one earns income in gold. It makes no sense to pay to convert your fiat income into gold, then spend that gold, and then the person on the other end to pay to convert that gold into fiat.
Even if there is some of that P2P gold spending going on, I don’t think there will be enough revenue from that for Kinesis to cover storage fees after paying out some share of it. And there certainly won’t be enough revenue from buy and sell fees, as my experience is that most PM investors are buy and hold, with many years in between the buy and sell.
In fact, the Kinesis free storage offering is likely to have and adverse selection aspect, in that it will appeal to people who want to hold PMs for a long time as they save many years of storage fees, so they will some money when people buy in but then have no cash flow as those people sit there without transacting or selling.
Offering P2P or debit card gold spending doesn’t matter to a Goldmoney even if it isn’t used much as they charge for storage, but for Kinesis their business model only works if there is a lot of transactions.
I think after a while they will just add a storage fee after they have used the free storage offer to get a lot of people into the system and run out of capital to cover the negative cash flow.
I was hoping you’d have some insights into ABX and Kinesis – thanks for taking the time.
I like your points about free storage, and people not spending their savings. Free storage will attract people who put their savings in gold. How does Kinesis make money on people saving in gold? I struggled with this, and I couldn’t find a way.
So let’s assume people would be happy to put their savings in Kinesis, and that will generate no TX revenues for Kinesis – in fact, it will just generate costs.
However if Kinesis can convince people to put their “checking account” (slash debit card) money in Kinesis, well then the world becomes their oyster, because that’s where the TX take place. It doesn’t seem too likely – just from the accounting problem alone, but who knows. Maybe other countries tax systems aren’t nearly as annoying as they are in the US. “Auto-deposit my paycheck into my Kinesis account, and I can earn TX revenues when I spend my paycheck into the Kinesis economy.” Its like a loyalty card program.
Here’s another possibility: the use of Kinesis as a “stablecoin” – a parking place for coin traders who want something more reliable than an unaudited Tether promise. Currently, my understanding is, there are real problems for people who want to construct a bank-deposit-backed stablecoin having to do with banking regulations and AML and the like. Kinesis would seem to be able to skate around that by not being a bank, and not having currency deposits. Gold != currency.
Oh, Kinesis follows all the rules for initial deposits – but once the coin is minted, it can be transferred to anyone else. The rules no longer apply.
There is a lot of demand for stablecoins right now. If they could charge a premium because they’re so much well-audited than Tether, and they aren’t subject to the same banking rules as are all the other stablecoins, that could be where they make their big money.
The stablecoin point – its a collection of guesses, since I’m neither a banker, nor a bullion dealer, nor am I one of those whales who needs a place to park big bucks in between coin trades, so I’m talking beyond my expertise. Hopefully you can weigh in. 🙂
- This reply was modified 9 months, 2 weeks ago by davefairtex.
I can’t see anyone putting checking account money into a gold backed crypto, first because you have to pay transaction fees to convert fiat to gold crypto (which you don’t if you just keep it as fiat) and second as you note, every “spend” is a capital gain tax event (and few countries exempt capital gains). It does become an accounting nightmare to work out the gains and in Australia at least, concessional tax rates on capital gains only apply if you hold the asset for 1 year or more, so many of the “spends” could end up being taxed at ordinary income rates.
As to the stablecoin opportunity, that is a possibility and it would generate more buy/sell volumes as the crypto bros trade in and out more frequently than your average gold investor, but they won’t use it for spending either. At the moment that market has few competitors (http://vaultoro.com, https://www.bitpanda.com/en/metals, https://digix.global/ for example) so there is an opportunity but success here requires connections and marketing into the crypto community. Vaultoro has the lead in this space IMO having been around since 2015 but Kinesis has been active. The other one to watch is https://www.paxos.com/ which is a US regulated USD stablecoin but which was reportedly looking at doing a gold stablecoin.
Re “The rules no longer apply” I wouldn’t be so sure. Certainly according to FinCEN https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf Kinesis type systems are money transmission services so those regulations apply.