"Digital Gold" is also coming?

The World Gold Council is seeking to launch digital gold, creating a new model for trading, settlement, and collateral in precious metals, which could fundamentally reform the $900 billion physical gold market in London.

On Wednesday, World Gold Council CEO David Tait stated in an interview with the Financial Times that although many investors value gold precisely for its physical characteristics and lack of counterparty risk, viewing it as a safe-haven asset, gold must be digitized to expand market coverage. This new digital unit, called "Pooled Gold Interests" (PGIs), will pilot in London with commercial participants in the first quarter of next year.

Gold reached a historic high this week, doubling in value over the past three years. However, for most banks and investors, gold remains a static, non-yielding asset on their balance sheets. Digitized gold could be used to meet margin requirements and as collateral for profit-making purposes.

However, the current plan faces market resistance, as the gold market is dominated by entrenched interests that favor safe-haven assets. Adrian Ash, research director at gold trading platform BullionVault, questioned whether the London wholesale market would adopt this innovation, suggesting that "this seems like a solution in search of a problem."

Digital Gold Targets $90 Trillion Collateral Market

The "Pooled Gold Interests" launched by the World Gold Council will allow banks and investors to buy and sell fractional ownership of physical gold stored in independent accounts. This framework relies on a small core group of participants jointly owning the underlying gold within a trust structure.

Tait pointed out:

From a collateral perspective, banks will benefit significantly as they gain the opportunity to use gold on their balance sheets as collateral. We are working to standardize the digital layer of gold so that various financial products used in other markets can be applied in the gold market.

The pilot project will include "major banks and trading companies" as joint owners of the underlying gold, confirmed by Allan Guild, founder of project consulting firm Hilltop Walk Consulting.

London Market Seeks Third Trading Model

The "local" wholesale gold market in London is the world's largest physical trading center, supported by large positions held by commercial banks such as HSBC and JP Morgan, as well as the Bank of England's vault capacity, operating on an "over-the-counter" trading model.

Currently, there are two types of trading in the London market: "allocated" gold trading involving specific gold bars, and "unallocated" gold trading that does not specify particular bars. According to a white paper released on Wednesday by the World Gold Council and law firm Linklaters, this proposal will create a third type of trading for London’s over-the-counter gold market.

This is the latest step in the World Gold Council's years-long project to digitize the gold market, following the launch of a blockchain database for refineries and gold bars earlier this year.

Challenges from Cryptocurrency and Stablecoin Competition

Despite the surge in gold prices, industry insiders believe that this one of the world's oldest assets faces the risk of being surpassed by competitors such as cryptocurrencies and stablecoins pegged to traditional assets So far, most efforts to create gold-backed stablecoins have ended in failure. The two most successful gold stablecoins, Tether Gold and Pax Gold, manage approximately $1.3 billion and $1 billion in assets, respectively, compared to gold-backed exchange-traded funds that hold $400 billion.

Some market participants indicate that these efforts may face resistance, as the gold market is dominated by existing participants who are highly entrenched and risk-averse.

The blockchain database "Gold Bar Integrity Program," jointly launched by the World Gold Council and the London Bullion Market Association in January this year, has adopted a relatively slow pace. However, Ruth Crowell, CEO of the London Bullion Market Association, stated that there is "very good acceptance" in the refineries, with 96% of the good delivery list refineries having joined.

Tait acknowledges that the process can be difficult at times but still believes it can change the way gold is procured. He stated, "As the database becomes ubiquitous, everyone will use it... every gold bar will ultimately have its own passport, its own birth certificate."

Risk Warning and Disclaimer

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