World Gold Council Plans Digital Gold Launch: A Potential Shift for the London Gold Market

World Gold Council Plans Digital Gold Launch

According to a report by the Financial Times, the World Gold Council (WGC), the trade body representing gold mining companies, is planning to launch a digital form of gold. This move aims to bring sweeping changes to how gold is traded, settled, and used as collateral, potentially transforming the $900 billion London physical gold market.

David Tait, the CEO of the WGC, stated that the new form of gold would for the first time allow “gold to be digitally transferred within the gold ecosystem and used as collateral.”

While many investors value gold for its physical properties and absence of counterparty risk, making it a safe haven asset, Tait believes that digitizing gold is essential to expanding its market reach.

“We are trying to standardize the digital leg of gold so it can be used in the various types of financial products that exist in other markets,” said Tait, who previously worked in banking. He added: “My ambition is to change how a lot of the asset management institutions in the world look at gold.”

Digital Gold: Unlocking New Potential

While gold prices have reached record highs this week and have doubled in value in the past three years, gold is still considered an illiquid, non-yielding asset on the balance sheets of most banks and other investors. Tait believes that digitizing gold could allow it to be used to meet margin requirements or as collateral, thus generating income.

“From a pure collateral point of view for banks, they can make an absolute fortune because they have got the opportunity to use gold on their balance sheet as collateral,” Tait explained.

The new digital unit, dubbed “pooled gold interests (PGIs)”, would allow banks and investors to buy and sell fractional ownership of physical gold stored in segregated accounts. A pilot program is planned to begin with commercial institutions in London in the first quarter of next year.

A white paper published by the WGC and law firm Linklaters indicates that the framework relies on a small number of core participants who jointly hold the underlying gold through a trust structure. This is the latest step in the WGC’s efforts to digitize the gold market over the years. In January of this year, the council already launched a blockchain database for refineries and gold bars.

Addressing Competitive Challenges

Despite the rise in gold prices, some industry experts believe that gold, as one of the oldest assets in the world, is at risk of being surpassed by competitors such as cryptocurrencies and stablecoins pegged to traditional assets.

By launching the new digital gold, the WGC hopes to achieve what others have failed to accomplish.

To date, most attempts to create gold-backed stablecoins have ended in failure. The two most successful gold stablecoins currently, Tether Gold and Pax Gold, manage approximately $1.3 billion and $1 billion USD respectively, a tiny fraction of the $400 billion USD managed by gold ETFs.

The London gold market is the largest physical gold trading center in the world, backed by huge holdings from commercial banks such as HSBC and JPMorgan, as well as the treasury reserves of the Bank of England, and trading is conducted “over-the-counter (OTC)”, where the parties directly reach a deal without needing to go through a central clearing house.

The white paper indicates that trades in the London gold market fall into two categories: “allocated gold” trades (which involve specific gold bars) and “unallocated gold” trades (which only specify the quantity of gold, without specifying particular bars). The WGC’s proposal would add a third type to London OTC gold trades.

Alan Guild, founder of Hilltop Walk consulting, which is advising on the project, stated that the pilot program would enlist “major banks and trading houses” as joint holders of the underlying gold.

However, some market participants believe that this move may face resistance because the gold market is dominated by entrenched, risk-averse institutions.

Adrian Ash, research director at gold trading platform BullionVault, questioned whether the London gold market would adopt this model. He said:

“Gold is already the best performing asset class. This feels like solving a problem that doesn’t exist.”

Previous Efforts and Future Prospects

In January of this year, the London Bullion Market Association (LBMA), which represents gold trading banks, and the WGC launched a blockchain database called the “Gold Bar Integrity programme,” but promotion of this database has been slow.

However, Ruth Crowell, CEO of the LBMA, stated that “rollout has been very smooth” within the refinery community. 96% of refineries on the LBMA’s “good delivery list” have joined the program.

Tait said that the goal of the database is to increase transparency in refineries, verify the source of gold, and gradually eliminate “bad practices.” He said: “This process is difficult at times. But I remain confident that it will one day change how gold is sourced.”

Tait added: “As the database takes off, everyone will be using it… Every gold bar will eventually have its own ‘passport’, its own ‘birth certificate.’”