For over 5,000 years, physical gold has played a primary role in the international monetary system. As the world’s oldest money, financial institutions are looking to combine gold and other precious metals with “new money” in the form of digital cryptocurrencies, which is otherwise known as blockchain technology.
It is estimated that $27 billion of gold is exchanged between buyers and sellers in markets around the world every single day. That being said, there is an urgent need to ensure buyers and sellers that the gold they are investing in is protected against inflation, currency debasement and any other global uncertainty. A recent pilot test of blockchain technology within the gold sector has launched in an effort to improve the transparency and security of gold in our world.
Gold Blockchain Pilot Study
Blockchain technology, such as the popular Bitcoin, offers its users a public online ledger to monitor, verify and record any transaction made within the system. In partnership with a number of financial institutions including Citi, Scotiabank, Societe Generale, Barrick Gold Corp., INTL FCStone and several others, the transaction settlement service Euroclear in collaboration with Paxos cleared more than 100,000 gold transactions by employing blockcahin technology.
How it Works
To understand how a gold transaction would occur through the blockchain technology, imagine that an individual is looking to send his family in Singapore a certain amount of gold. Once he completes the online gold transaction to his family and it is cleared, they are then able to obtain the gold from any of the numerous vaults that are a part of the online platform, BullionVault, which is connected to the aforementioned companies involved in the pilot study. BullionVault runs vaults around the world in Zurich, London, New York and Singapore, handling a total of 38 metric tons of gold which totals at an estimated $2 billion worth.
A trader begins the day by using a digital gold to meet margin requirements for trading in Hong Kong. Once positions have been flattened. The metal can be transferred digitally, through Bankchain Precious Metals, for reuse in London, New York and other global financial centers during the same trading day.
Advantages and Disadvantages
By employing the blockchain technology into this exchange network of gold, money managing companies such as TradeWind, which has already found success in the technology, is better able to manage accounts, handle records and improve trade settlements between buyers and sellers of gold.
While blockchain technology does not solve the physical handling of the gold once it is picked up from the vault, this type of personalized transaction avoids the involvement of governments or commercial banks. By removing the government influence in the gold transaction, buyers and sellers are able to gain a greater control of the price and supply of gold. An additional limitations involve the constant fluctuations in the value of gold around the world, which could affect the accuracy of a transaction.
For example, if a gold transaction was made on Day 1 and did not get approved until Day 6, the value of gold could dramatically change and affect the usefulness of this combined effort.
A Future Look at Blockchain Technology in the Precious Metals Market
The useful combination of blockchain technology into this highly popular market will still require many more transactions to confirm its overall reliability. The success of this pilot study has also inspired coin dealers, metal recyclers and other bullion buyers from around the world to look into how blockchain technology can also help their businesses. Researchers believe that the implementation of this system could significantly lower transaction costs of gold and other metals.
- “Transforming the Precious Metals Market” – Paxos
- “The Blockchain Revolution is Gunning for the Gold Market” – Fortune