Digital Gold and the Latest Updates in the IndustryBy Jeffrey Premer, CEO, Vaultex & Simon Sywak, COO, Vaultex
The term “digital gold” has been hurled about by pundits everywhere in reference to Bitcoin or even unbacked digital assets in general.
The term digital gold has only one legitimate definition: physical gold stored in custody and represented in digital form on cryptographically secure public or private ledgers. This is where one could digress into a discussion on the value of unbacked digital assets versus asset-backed digital assets, but I will leave that rabbit hole for another day.
Digital gold is nascent but growing and has shown it can be efficient in both trade and collateralisation. Digital gold tokens are popular on major cryptocurrency exchanges. These “stablecoins” can be used during volatile down swings in the digital asset markets by traders to quickly align their portfolios into an asset-backed token that is less volatile than cryptocurrency but still not pegged to a government-backed currency. Digital gold tokens can also be “staked” on decentralised lending platforms, creating a revenue stream for the token owner through lending yield. Not all digital gold tokens are equal, and due to differences between them, some flourish, and some seem relegated to obscurity. We will ignore the obscure issuances and focus on the successful ones.
PAX Gold (PAXG) was issued by Paxos, a US-based licensed custodian and trust company. PAX Gold has issued over US$600 million in gold-backed tokens since its founding in 2019. PAX Gold is redeemable for an LBMA good delivery gold bar or cash settlement from the issuer on demand. PAX Gold’s success can be partially credited to the reasonable pricing and its strong ecosystem partners like Brinks for storage, StoneX for bullion supply, and popular cryptocurrency exchanges that have listed PAXG. Trading volume and demand are primarily retail buyers and traders. PAXG has seen daily trading volume as high as US$315 million per day.
|Token||Market Cap (total issued)||Highest daily trading volume||Recent daily trading volume|
|Tether Gold (Gold)||$477,000,000||$33,000,000||$33,000,000|
|PAX Gold (PAXG)||$600,000,000||$315,000,000||$26,000,000|
Digital Gold – 1 Year Market CapSource: CoinMarketCap
Tether Gold (GOLD) is issued by TG Commodities Ltd., affiliated with the Hong Kong company Tether Limited, which in turn is controlled by the owners of Bitfinex. Tether USD, a popular USD-backed token issued on the Ethereum network, has seen many allegations of fraud and paid millions in regulatory fines for misrepresentation. Regardless, retail cryptocurrency enthusiasts and traders do not seem fazed by the tainted history and have bought nearly US$477 million from Tether Gold, which trades on various exchanges at a US$33 million trading volume per day. Considering Tether’s past, trading or holding Tether Gold was not an attractive option for institutional investors.
As previously mentioned, one attractive aspect of digital gold is that they can provide yield to token holders who lend them out via smart contracts on decentralised lending platforms. This staking of digital gold produces yield for any amount of time in a secure manner as the token return is guaranteed through the smart contract and is essentially a risk-free carry income.
In addition, digital gold can be used as collateral on decentralised lending platforms to speculate on unbacked digital assets. The collateralisation is also done through smart contracts and, although always at risk of a margin call, in the event of a market loss, a good trader would be able to profit from this ability and still retain his original gold position. We will surely see new and innovative decentralised platforms that create opportunities for the digital gold holder.
But the real opportunity for blockchain and gold is institutional.
Currently, the presence of an institutional secondary market for the tokenisation businesses is developing. The technology behind such a market needs to be very modular and scalable, allowing expansion into other asset classes in the future and streamlining the secondary market infrastructure.
Gold in Asia is just the beginning. The value of tokenised gold will only be realised when institutional investors like retail consumers can deploy capital via a regulated secondary market working with a public distributed ledger (blockchain).
Singapore is well-positioned to be the regulated Asian secondary market to provide services to the ecosystem in tokenisation of precious metals and other commodities and workflows in the future.
New capital markets need faster trading options to improve settlement risk management and custody and, from a regulator’s point of view, are technology-neutral.
Innovative technology addresses the issues in secondary market infrastructure
Securities issuance and transfer require a known identity, but most chains are built for pseudonymity. Therefore, an institutional-grade customer due diligence process is required to ensure all actors on the chain are verified and transactions are authored by permissioned entities.
Solutions built on top of general-purpose blockchains struggle with processing the complex logic needed to comply with regulations. Participants will need an ability to build compliance into the chain, enabling faster processing and lower protocol fees that can scale as demand and complexity of regulation grow.
Most market participants need their position and trades to remain confidential, but anyone can see and view the holdings on blockchains. Hence, the solution needs to engineer a secure asset management protocol that enables confidential asset issuance and transfers.
Contentious forks in the chain present significant legal and tax challenges for tokens backed by real assets. Therefore, participants need to adopt an industry-led governance model to prevent hard forks and guide the chain evolution.
- Finality of settlement
The distributed ledger serves as an immutable golden record for asset ownership. Digitalisation by creating assets at the protocol layer can provide a simplified approach to transfers and deterministic finality using a distributed ledger technology whilst complying with regulatory developments.
A secondary regulated market is a venue to allow institutional liquidity and access.
Less complexity and better operational efficiency
It is also an architecture to simplify workflows in complex and legacy market infrastructure whilst maintaining the current ecosystem and incorporating a digital ledger. By using modular technology, it will be able to reduce cost and increase efficiencies using current and future technologies to develop an advanced secondary market structure.
Faster, cheaper transactions
The token holder’s rights, legal responsibilities and record of ownership can be embedded into the market ecosystem using distributed ledger technology.
Greater transparency and broader access
An accredited and regulated secondary market establishes access for more institutional investors to a previously unaffordable or insufficiently divisible asset class, only available to retail clients through unregulated and unsecured platforms, using best-in-class technology. It also assists and enables regulatory bodies greater transparency and monitoring through access via the ledger layer and enhances the providence of the capital market structure.
In conclusion, as emerging technologies continue to evolve and regulation develops, IT and business partners need to remain closely aligned on their digitisation strategies. The establishment of a regulated secondary market will enhance the existing infrastructure ecosystem through digitisation and tokenisation. However, firms that struggle with adoption or do not fully embrace and invest in digitisation won’t have the ability to adapt and seize new opportunities in the future. Therefore, digital gold and other asset classes offered by Vaultex are an obvious starting point for this process via its secondary market infrastructure.
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