Is "digital gold" coming soon?

The World Gold Council plans to pilot "Pooled Gold Instruments" (PGIs) next year, allowing banks and investors to buy and sell fractional ownership of physical gold stored in segregated accounts. The CEO of the World Gold Council stated that gold must be digitized to expand market reach. Gold remains a static, non-yielding asset on balance sheets, but digitized gold can be used to meet margin requirements and serve as collateral, enabling profit-generating uses.

Written by: Zhao Ying

Source: Wallstreetcn

The World Gold Council is seeking to launch digitized gold, creating a new model for precious metals trading, settlement, and collateralization—a move that could fundamentally reform London’s $900 billions physical gold market.

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

Gold hit a record 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 can be used to meet margin requirements and serve as collateral, enabling profit-generating uses.

However, the plan currently faces market resistance, as the gold market is dominated by vested interests seeking safety. Adrian Ash, Research Director at bullion trading platform BullionVault, questioned whether the London wholesale market would adopt this innovation, saying, "This looks like a solution in search of a problem."

Digitized Gold Targets $9 Trillion Collateral Market

The "Pooled Gold Instruments" launched by the World Gold Council will allow banks and investors to buy and sell fractional ownership of physical gold stored in segregated accounts. The 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 co-owners of the underlying gold, confirmed by Allan Guild, founder of project advisory firm Hilltop Walk Consulting.

London Market Seeks a Third Trading Model

The "London local" wholesale gold market is the world’s largest physical trading center, supported by large holdings from commercial banks such as HSBC and JPMorgan, as well as the vault capacity of the Bank of England, operating on an over-the-counter (OTC) basis.

Currently, there are two types of trades in the London market: "allocated" gold trades involving specific bars, and "unallocated" gold trades that do not specify particular bars. According to a white paper released Wednesday by the World Gold Council and law firm Linklaters, this proposal would create a third type of trade for London’s OTC 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 in January this year.

Challenging Competition from Cryptocurrencies and Stablecoins

Despite the surge in gold prices, industry insiders believe that one of the world’s oldest assets faces the risk of being overtaken by competitors such as cryptocurrencies and stablecoins pegged to traditional assets.

So far, most efforts to create gold-backed stablecoins have ended in failure. Currently, the two most successful gold stablecoins, Tether Gold and Pax Gold, manage about $1.3 billions and $1 billions in assets, respectively. In contrast, gold-backed exchange-traded funds hold $400 billions.

Some market participants say these efforts may face resistance, as the gold market is dominated by deeply entrenched, risk-averse incumbents.

The blockchain database "Gold Bar Integrity Program," jointly launched in January this year by the World Gold Council and the London Bullion Market Association, which represents gold trading banks, has adopted a relatively slow pace. However, Ruth Crowell, CEO of the London Bullion Market Association, said acceptance among refineries is "very good," with 96% of Good Delivery List refineries already onboard.

Tait admitted the process is sometimes difficult, but remains confident it will change the way gold is sourced. He said, "As the database becomes ubiquitous, everyone will use it... every gold bar will eventually have its own passport, its own birth certificate."