The process of delivering and tracking gold is suspected to go through some substantial changes soon. Most of these changes pertain to the incorporation of the innovative blockchain technology. This is the same technology that powers the equally innovative creation of cryptocurrencies. Both of these creations are making headway in other industries, like mortgages and competitive gaming.
In simple terms, blockchain is a ledger that functions like an online journal that is impossible to tamper with. The ‘blocks’ are pieces of data and the ‘chain’ is the public ledger itself. As soon as something is added to the ‘chain’, the information remains there for public consumption from then on.
Already there are a substantial amount of companies that want to utilize this technology to secure gold transactions. Among them is Emergent Technologies Holdings, which is developing a blockchain that tracks the origin of gold. What’s more, it can track where it is going. On top of this, the company is introducing a digital token, going by the name of G-Coin. This is a digital title of ownership specifically for physical gold that EmTech’s blockchain is tracking.
“Think of it as blockchain logging every stage, from mining to end market to digital wallets.”
The clout blockchain technology has on pre-existing industries is staggering
Blockchain technology is in the midst of completely reinventing both gold and diamond industries. On the whole, these industries contain complex ecosystems that rely heavily on supply chains. This is where cargo typically passes through an array of geographical locations before ultimately reaching its destination.
Since its inception, this technology has been responsible for the avoidance of corruption. Moreover, it improves the overall quality by way of tracking valuable assets at every milestone throughout their journey.
By effectively encoding gold in blockchains with digital methods, central banks and private holders alike will benefit from the process. They are able to account for every portion of the asset during its delivery. Those who are experts in this technology claim that blockchains have the potential to overthrow the current banking system. This is due to traditional banks essentially being the gatekeepers of these ledgers. Blockchains are capable of allowing both transaction participants to update the data on the ledger without middlemen involvement.
An asset as valuable as gold needs proper monitoring
Gold, as we know it, is one of the most valuable and expensive resources that exist in the world. It possesses substantial trade and intrinsic value and its price per ounce is currently over $1,480. Central banks employ the use of a “trust” system for every instance in which foreign central banks store gold. As popular a method as it is, it is not the most reliable; especially when storing such a valuable asset as gold. As a case in point, the central bank of Germany couldn’t immediately repatriate some of its precious metals from the U.S. back in 2013.
With the use of blockchain technology, the act of storing and tracking gold would comparatively be more secure. Should Emergent Technologies prove to be successful with its incorporation of blockchain into gold delivery, the trust system could become archaic.
Admittedly, they are not the first company that was hoping to use blockchain technology as a means to track gold. Regardless of that, Emergent Technologies claims that their particular approach is “fundamentally different.” This is largely due to the core focus of their mission is to track gold that is “responsibly-sourced.”
Mitch Davis, the Chief Commercial Officer at EmTech, clarifies that notable characteristic of the company fully embracing that specific gold. To elaborate, where there is a noticeable increase in the demand and premiums for gold mined under such practices. This is something that is easier said than done, though. Making a guarantee that gold is what it claims to be – in the imposed quantity and quality – is difficult. Moreover, it’s hard to make sure that it is mined and perfected in a way that conforms with strict standards. Specifically, that of human rights, environmental, industrial, financial, and legal standards.
Among the many companies that are jumping on this bandwagon is Britain’s Royal Mint. It is starting to allow businesses and investors to buy and sell digital tokens that are representing gold through blockchain transactions. The primary intent of the Mint is to make gold into a more attractive investment. They plan to do this by making trading a lot easier and cheaper, especially when you compare it to alternatives. Such alternate methods include exchange-traded funds (ETFs) or directly purchasing and storing gold bullion.
The Royal Mint is responsible for manufacturing the U.K.’s currency. On top of that, it also sells bullion, commemorative coins, and an array of other products. By utilizing its new blockchain system, the Mint aims to make gold transactions easier by having them be more transparent. What’s more, it hopes to make these transactions economical.
The development of this new system was a collaborative effort with the Chicago Mercantile Exchange. In addition, there was also the application of technology deriving from two blockchain startups. This brand new system transacts blockchain tokens that go by the name of ‘Royal Mint Gold’ (RMG). Each one of these tokens is a digital representation of one gram of actual gold in storage at the Mint’s facilities.
The Mint states that the price of RMG will closely track the spot price of gold. At the time of this writing, this spot price is roughly $48 per gram. Pre-launch reports from last year imply that the Mint could potentially create up to $1 billion in tokens.
Investors will have the ability to buy and sell RMG digital tokens by way of an institutional trading platform. Furthermore, the official recording of these trades will be as blockchain transactions.
The benefits from Mint transactions
According to the Mint, transactions that occur in its blockchain system will offer a variety of advantages. Moreover, these advantages will be comparatively more beneficial than other gold trading methods. For instance, it claims that there are no annual fees for being the owner of RMG tokens. This is noteworthy especially when you compare it to annual fees of 0.25-0.5% for gold ETFs. Relating to that, there are also the annual fees for secure storage for gold bars of roughly 0.12-0.25%. That will translate into a higher return on investment for RMG. The reason for this is that, as time goes on, the compounding effect of fees gradually diminish the overall return.
With the use of RMG, traders are also able to purchase smaller amounts of gold in blockchain transactions. In addition, there is the available real-time pricing that exists during exchange opening hours. The Mint says that, unlike shares in a gold ETF, RMG is exchangeable for physical gold. Be that as it may, there will be a “fabrication charge” for anything that’s smaller than a 400-ounce gold bar.
The director of new business for the Royal Mint, David Janczewski, states the following:
“While things have improved in terms of gold trading over the centuries, it’s our view that it still remains difficult and relatively expensive as a commodity to invest in … Gold is known in the industry as a negative-return investment … What we’re trying to do with the announcement of Royal Mint Gold – or RMG – is to really address this issue and offer a better way to invest in solid digital gold.”
Fixing a prominent issue
The London Bullion Market Association (LBMA), an over-the-counter market for trading gold and silver, made an announcement during October of last year. The core focus of its plan would be to revamp and improve transparency within the industry. They aim to do this with the incorporation of blockchain technology.
The technology has the potential to help expel unsatisfactory metals from the global supply chain. To be specific, metals that are “illegally mined or traded or used to finance conflict.” Evidently, this is a prominent industry-wide issue. To better explain this, there was an incident with three NTR Metals employees back in March of 2017. There were accusations from the FBI that they were importing up to $3.6 billion worth of gold from South American countries. They were refining it, selling it, and then sending the earnings back to “drug traffickers.”
So, in March of 2018, the LBMA took the initiative and asked for proposals. Those who were asked consisted of all 144 of the association’s members. These members would include the largest gold refiners, banks, and dealers in the world. With these proposals, they could determine how to track gold from mines to its final destination. Doing so will allow them to effectively prevent any instance gold bar counterfeit.
The association would later receive 26 proposals, all coming “from companies ranging from startups to major technology firms.” Sakhila Mirza, LBMA’s executive board director, did not disclose any specific names beyond that of IBM. The association, in general, is steadfast on not insisting on the utilization of blockchain technology. However, roughly 20 of the 26 responses were apparently open to the use of the technology in their project drafts.
The LBMA is planning to layout guidelines that will authorize and monitor technology providers. Mirza adds that:
“We need to set up criteria and standards that help us understand what is a credible blockchain solution … Once those have been appropriately established, the result would be a selection of service providers that meet the minimum standards.”
JPMorgan stepping in
Last year, there were reports that JPMorgan, the most valuable bank by market capitalization, is joining in on this trend. As America’s largest bank, it’s using its enterprise version of the Ethereum blockchain that supports smart contracts – ‘Quorum’ – to tokenize gold bars.
The first announcement of Quorum was back in October of 2016 as part of the Ethereum Enterprise Alliance (EEA). The U.S. bank came forward with an innovative blockchain-powered system. The intent of this system is to reduce the mandatory number of parties to validate global payments. By doing this, they can cut transaction times “from weeks to hours.”
The transition took place just one month following the CEO of JPMorgan, Jamie Dimon, famously calling Bitcoin “a fraud.” What’s more, Dimon was of the belief that it “won’t end well.” This was a comment that he would later add to, saying that he does not care about the cryptocurrency. Though, he made sure to mention that “blockchain is real.”
During the Sibos conference in Sydney, JPMorgan made mention of the concept of “tokenizing” assets. The company’s head of blockchain initiatives, Umar Farooq, would further elaborate on the idea:
“They wrap a gold bar into a tamper-proof case electronically tagged, and they can track the gold bar from the mine to endpoint – with the use case being, if you know it’s a socially responsible mine, someone will be willing to pay a higher spread on that gold versus if you don’t know where it comes from. Diamonds are another example.”
Tracking jewelry metals
During the course of 2018, leaders in the gold and diamond industry were partnering with IBM to develop a blockchain network. With this new network, they could trace the origin of any piece of jewelry. In late April of that year, a consortium of jewelry industry heads made an announcement about the TrustChain initiative.
“The TrustChain Initiative is a partnership of precious metals refiner Asahi Refining, jewelry retailer Helzberg Diamonds, precious metals supplier LeachGarner, jewelry manufacturer The Richline Group, and independent verification service UL. The measure aims to provide increased transparency across the supply chain.”
This initiative draws its foundation from the IBM Blockchain Platform and the Hyperledger Project. Its design allows it to verify and track diamonds and precious metals from their origin to their retail location. It provides its users with an array of features, which include verification of process and “third-party oversight.” Moreover, it provides digital and physical product validation. Overall, its objective is to make sure that customers’ jewelry purchases are properly sourced.
Upon applying this technology, these companies have the potential to carry out various tasks. They can digitize processes and establish an unchangeable record of transactions within the network. Furthermore, they would be capable of enabling access to trusted data in real-time.
The number of companies incorporating blockchain technology into their gold tracking systems is continuously growing. With other precious metals like diamonds receiving the same treatment, it seems like more instances of blockchain usage are on the horizon.