The wave of Gold trading technology is a game changer coming from the West

CME gold


Have you ever thought how much credit Betterment and Wealthfront merit, for the growth in passive investing, for pushing financial inclusion, for reducing costs? Do you realize how much Robos have changed the flow of funds into ETF vehicles?

Now take a minute to look at the early signs of how Blockchain is changing Gold markets. These past few weeks, there has been a series of noteworthy announcements around Gold trading technology.

Who cares?

We are already culturally trusting Gold and therefore, anything that improves Gold’s prospects as a store of value or as a means for exchange, is significant. Gold remains a candidate for a reserve currency and can also be used as trade collateral. Gold inherently has desirable features (e.g. limited supply, fungibility, ease of exchange). However, Gold markets are surprisingly old fashioned.

Did you realize that Gold prices were fixed twice a day via a conference all, up until 2015? Did you realize that only in 2015, Gold trading switched to an electronic pricing system? However, most trading of physical buillion still occurs in the OTC market and pricing is still fixed twice daily via the futures markets.

Did you realize that there is still no reliable real time system tracking the supply-side of Gold?

Did you realize that most physical gold is centrally stored with either government entities (like the Royal Mints) or banks?

There is a lot of room for improvement in the Gold trading market. Anything that can improve price discovery, settlement, counterparty risk, verification of the underlying deliverable, tracking of the supply in the market; is significant.

Any new possibilities to replace “paper gold” with solid backing of physical gold, is also a great improvement in the Gold trading.

Paper gold includes Gold certificates issued by banks and mints that give you exposure to gold, futures accounts, ETFs ect. All these are risky in a flash crash kind of scenario, in which there is not enough physical gold to back Paper Gold.

A small taste of the complex issues from the “paper gold” market:

Owners of gold exchange traded funds (ETFs) would be surprised and worried to discover that certain banks might be lending out gold that they have bought and believe that they own.

The leading gold ETF, GLD has been criticized by many analysts for its extremely complex structure and prospectus. Critics have also pointed out the possible conflict of interest in its relationships with HSBC and JPMorgan Chase which are believed to have large short positions in gold and overall lack of transparency. 

If as has been suggested, European banks are lending gold into the market that has come from exchange traded funds then this would validate the many concerns raised about the gold ETF market. Questions would again be asked as to whether many of the ETFs are fully backed by the gold that they claim to own in trust on behalf of clients.Source

What is the Gold tech innovation?

Towards the end of last year there were a dozen PR press releases about the Royal mint of Canada and the UK Royal Mint experimenting with blockchain technology to essentially digitize the gold they keep stored in their vaults. Bear in mind that is a predominantly institutional market but of course, there is some value in promoting the trustworthiness of a country as a trusted big player in the Gold market.

Right now, it seems that the UK Royal Mint is a front runner as they announced just before Easter that they are live testing trading on a CME platform of a Digital Asset – The Royal Mint Gold (RMG).

This is a partnership project amongst The UK Royal Mint (TRM), CME, Alpha Point and BitGo.

CME, the largest gold futures exchange, is offering the trading platform. TRM has agreed to digitized 1 billion worth of gold that is stored in its vaults. Alpha Point, a blockchain startup, has assisted in issuing a Token (issuer is TRM) representing a piece of the gold that TRM has agreed to digitize. Alpha Point has designed the permissioned private blockchain on which the RMG token can trade. BitGo, has designed the digital wallet that can store these tokens following a multi-signature procedure.

There are others participants that have also launched similar projects (making less noise in the press). Both the Euroclear exchange and the IEX exchange have similar projects announced last Fall.  Euroclear is also experimenting with the digitization of oil. They are collaborating on the digitization of the two commodities with Paxos, a Fintech whose proprietary ledger solution focused on post-trade settlement, is Bankchain. IEX has revelaed less about their moves. They have spun off a separate entity, TradeWind Markets, that is focused on digitizating commodities for their exchange.

Alpha Point is a blockchain tech company that offers a variety of blockchain solutions (more than 20 ledgers and fabrics, ETH, R3, Hyperledger etc plus its own proprietary ledger) with a focus on solutions to digitize, trade, and manage assets with blockchain technology. You can listen to a recent interview on Futuretech Podcast of Igor Telyatnikov, the President & the COO of Alpha Point who explains AlphaPoint’s secure, scalable, and fully customizable platform that can process nearly 1 million transactions per second (recall that bitcoin blcokchains can process 7 transations per second)

RMG is the first token from a government owned entity (issued by the TRM and representing ownership of gold in their vault). We will be seeing, probably by the end of 2017, multiple issuers and multiple tokens trading on various blockchains. Most of them seem to be permissioned and private (I have partial info about this).

There are other tokens issued from private companies, when buying physical gold from them – Digix GlobalCodeTract, and DinarDirham. Digix Global, for example, issues a Digix Gold Token (DGX) that represents the specific gold bullion bought through them and kept in a special, securitized vault. CodeTract’s Gold Token (GCT) or DinarDirham’s Dinarcoin (DNC) are the Digital Gold tokens if when buys gold through them respectively.

Where do we stand?

  • Does such kind of digitization of Gold reduce storage costs and therefore, allow to pass through these savings to investors? I think Not.
  • Does such kind of digitization of Gold reduce the counterparty risk associated with the entity offering the vault services? I think Not.
  • Does such kind of digitization of Gold improve price discovery and eventually lead to the elimination of the price fixing? I vote Yes keeping in mind that it is early stage of such a process.
  • What are the main benefits of the digitization of Gold with multiple issuers-tokens?  Immediate settlement of trades, secure verification of the quality underlying deliverable, tracking of the supply in the market! Replacement of “paper gold” (i.e. certificates or ETFs) by digital gold, which would mean elimination of the inherent risks associated with these derivatives in case of a bear market panic.
  • What is missing? Clearly, gold miners need to get involved in this process so that the digitization starts from there and not from the vaults. Clearly, the current choice of private chains creates interoperability issues.

And before wrapping up this post, I have to draw your attention to China which is testing the “waters” with Micro-Gold platforms. This is Not digitizisation of gold. This is actually growing the “paper gold” market online or via the Internet of Finance.

Tencent issued a new feature on WeChat for Valentine’s day, that allows you to send your loved ones not chocolate, not flowers, but Virtual Gold packets. This is similar to the Red envelope Wechat feature (i.e. digital money).

This feature is through a collaboration with the Industrial and Commercial Bank of China. Essentially users can easily buy and sell gold as an investment from ICBC through the messaging platform.

The minimum amount of gold that can be bought is 0.001 grams – which on February 13 was sold at 28 fen. The maximum transaction limit to buy the gold is 100,000 yuan, which can get gift givers 364.856 grams of gold at current prices. So far, the feature is only available in China.

Once the gold is bought, they can then give out up to 100 gold packets at a time, with not more than 1 gram of gold per gold packet. But for Valentine’s Day, Tencent will increase the limit to 1.314 grams per gold packet, as the numbers 1314 in Chinese sounds similar to the Chinese saying “for the rest of my life”. Source

Efi Pylarinou is a Fintech thought-leader and an investor. 

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  1. “The leading gold ETF, GLD has been criticized by many analysts for its extremely complex structure and prospectus.”

    Thank you for this well written piece. I don’t see paper gold like GLD receiving enough of this type of criticism. Paper gold GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion. This fact alone would mean GLD shares are nothing more than paper at the end of the day. Furthermore, GLD’s prospectus is chalk full of weasel clauses and legal loopholes that allows the fund to get away without the full physical gold backing. One good example of this is the clause that states GLD has no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this audit loophole. I’ve also verified the following to be true and welcome everyone else to do so:

    “Did anyone try calling the GLD hotline at (866) 320 4053 in search of numerical details on GLD’s insurance? The prospectus vaguely states “The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody.” When I asked about how much of the gold was insured, the representative proceeded to act as if he didn’t know and said they were just the “marketing agent” for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.”

    “I remember there was a well documented visit by CNBC’s Bob Pisani to GLD’s gold vault. This visit was organized by GLD’s management to prove the existence of GLD’s gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this “GLD” bar was actually owned by ETF Securities.”

    • Thanks. The problem you are describing sounds ripe for an immutable distributed ledger. I would trust crypto more than one random visit by a TV anchor person.

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