Banking
The World Gold Council is looking to recreate E-Gold as a blockchain token
Oct
Post-financial crisis banking reforms began to affect gold this year after market participants were unable to prove that the asset could easily be traded in stressful times.
The new rules, in effect, made it more expensive for banks to hold bullion, compressing the already meager returns they make trading the commodity, and raising concerns the market will shrink. And in the past decade, gold has faced growing competition from cryptocurrencies for the attention of investors looking for alternatives to stocks, bonds, and cash–with some boosters even calling Bitcoin “digital gold.”
Tait says digitization will make a wider range of investors comfortable holding the metal. “There’s a plethora of industries, let alone institutions out there, who haven’t gone near this product in the past,” says Tait, a former managing director at Credit Suisse AG. “They’ll have the opportunity to do that if we get this right.”
Retail investors struggle to access the gold market directly. Like many physical commodities, it’s subject to different standards in different places. London uses 400-ounce bars for its trading, while popular Comex futures traded in the US use 100-ounce bars. But even the smaller version will set you back more than $160,000, so most retail investors must instead buy smaller bars and coins from dealers, often at large premiums. Tait thinks creating tokens that are easily exchangeable for physical bullion could solve that problem.
The concept of a tradeable asset that represents ownership of metal held in a vault somewhere isn’t new. The council in 2004 helped launch a gold-backed exchange-traded fund, SPDR Gold Shares, that currently holds $50 billion in assets. But retail investors generally can’t swap ETF shares for the actual metal; that’s only for large institutional investors who help maintain the market for the shares. There are also gold-backed crypto stablecoins, but they’ve failed to gain much traction.
The token Tait’s team envisions would need the backing of the entire market, from Wall Street banks to the Indian and Chinese authorities who run the top consumer markets. In the meantime, a blockchain ledger that tracks gold bars could help reassure buyers of their origin and purity while helping to fight money laundering.
The main hurdle will be persuading the market’s big players to embrace a project that risks eroding their dominance. Trading of gold futures on the London Metal Exchange was shelved this year because JPMorgan Chase & Co. and HSBC Holdings Plc, the two biggest banks involved in processing transactions, declined to get involved. JPMorgan and HSBC did not respond to requests for comment.