Skip to main content

Gold on a blockchain? What, how and why?

FinTech magazine Gold on a Blockchain? What, how and why?

Andreas Ruf, CEO of InfiniGold, discusses the rise of tokenised gold, and assesses why it may be a crucial development for the gold industry

Gold is a quintessential asset for any portfolio. Having served as a store of value for thousands of years, it is recognised by societies around the globe for its enduring ability to retain value. From central banks to Wall Street institutions right through to the retail investor, the precious metal has established itself as the ultimate safe haven asset in times of economic turmoil.

There are a number of factors that make gold stand out from other elements on a chemical level. For one, it’s scarce, meaning that its value cannot easily be debased. It’s also costly to mine and refine, and, try as they might, alchemists have yet to master how to synthesise it in a laboratory.

Fiat currencies, by contrast, can be printed at the discretion of central banks, effectively devaluing that which is already in circulation.

When you combine this with the deflationary principles of inflation – which demonstrate that the purchasing power of money is always decreasing – all of a sudden cash doesn’t make a very sensible place to store your wealth for any length of time.

Other reasons that have made gold traditionally appealing are its fungibility (one ounce of gold is functionally identical to another) and durability (it is scratch-resistant and doesn’t tarnish).

Over the years, though, as we’ve migrated into a digital setting, our expectations of ‘portable’ have shifted considerably. When it comes to the trading of physical gold, market liquidity is impacted significantly by the cost and effort required to move it.

SEE MORE

Since the turn of the millennium, gold has rocketed in value by 500%. As the price has appreciated, so too have the reserves held by sovereign nations, which have been steadily accumulating the asset over time. 

On the institutional and retail fronts, a myriad of financial products have developed over the years to allow for easier exposure to gold. However, blockchain technology opens up  new avenues for investors to enter into government-guaranteed gold markets via the issuance of gold-backed tokens. In the following article, we’ll explain how and why this is such a paradigm shift.

Blockchain 101

A blockchain is really just a specific type of database. It’s a powerful technology, however, as it’s not owned by a single user, but rather by an entire network, whose participants each own a copy that is continuously updated.

Generally speaking, the most common use-case for a blockchain currently is for securely transacting cryptocurrencies – a user needs only pay a fee to the network in order for their transaction to be added to the ledger for auditability purposes.

These data structures are publicly accessible, and anyone can participate or build tools on them. When it comes to transacting, fees tend to be cheaper than those associated with traditional financial institutions, as there are no middlemen or central authorities taking a cut.

FinTech magazine gold on a blockchain

Where Does Gold Factor In?

Cryptocurrencies have been the most popular use case for blockchains thus far. For the most part, these digital currencies have been highly speculative and, as an extension of this, have seen high price volatility.

However, as the market matures, the major markets in turn have become more stable. This road to price stability has made spot trading less exciting for retail investors and, as a result, we have witnessed the demand of futures markets such as Bakkt, CME and BitMEX, where crypto assets can be leveraged multiple times over.

This burgeoning stability has also made the digital markets more appealing for institutional investors, although they are still cautious because of historic price fluctuation. 

This caution is warranted, and has given rise to the stablecoin as a mechanism for traders to safeguard their positions. A stablecoin is a cryptocurrency backed by a reserve asset –  typically the US Dollar – but which can be any other low-risk asset or bundle of assets.

In a market famous for its volatility, they offer price stability, by pegging each token in circulation to a set amount of fiat currency (held in reserve by the issuer)

This same approach can (and has) been done with precious metals. An issuer who holds, say, 100oz of gold could hold this in reserve and create 100 tokens, each of which is redeemable for one ounce.

These tokens could circulate freely – sent back and forth around the world for nominal fees, stored in smartphone wallets, and eventually traded in for physical gold by whoever holds them. 

As a result, a user of such a system gains most of the benefits of physical gold, without any of the drawbacks of physically holding it.

Why is this important?

Tokenised gold may be one of the most important developments in the gold industry. Short of physical use cases, it improves on the functionality of gold in every way – in that it’s trivial to store, it’s readily-accessible to anyone with an internet connection, and it can be traded cheaply and instantly all across the world.

It will appeal to all kinds of buyers, and, most importantly, open the doors to new types of investors – from those who simply want exposure to small amounts of the asset, to long-term investors that do not wish to take physical possession of their gold holdings, to traders (both from the traditional financial markets and emerging digital asset ones) seeking an alternative to existing gold products.

As the financial world continues to evolve and become increasingly digitally-focused, traders will benefit from the accessibility and price stability of government guaranteed gold to safeguard their financial interests. 

For more information on all topics for FinTech, please take a look at the latest edition of FinTech magazine.

Follow us on LinkedIn and Twitter.