Tokenization

Gold tokenization as a way to change the financial market.

Gene Deyev

Apr 21, 2021 • 4 min read

Gold has always been one of the most popular investment assets. People have always bought gold as a way to save capital, especially during times of crisis. Gold has always played a significant role in the financial system and is now a symbol of luxury and wealth. Today's annual consumption of gold is more than 4.3 tons, of which 35% is investment demand for gold bars and coins. This article will tell you how gold tokenization can change the market and make investments even easier and more profitable.

What is happening with the gold market now?

During difficult economic times, such as a pandemic or war, many investors prefer to invest in hard assets like gold bars. Such assets retain their value regardless of the situation, so they are an excellent way to hedge against inflation. Analysts are convinced that gold will become more and more attractive in the coming years as the world becomes more unstable in geopolitical and economic terms.

On the other hand, many retail and institutional investors are not yet in a hurry to invest in gold because the principles of buying, selling, and transferring gold bars are very outdated and complicated. Basically, all these operations are manual, which is why gold today can hardly be called a highly liquid investment asset.

Also, the size and weight of gold bars are a problem because they are not easy to transport over long distances, and they are also difficult to store. In addition, gold must be professionally assessed for its purity. Only individual specialists can do this, which complicates the entire investment process. Gold tokenization solves many of these problems.

Features of gold tokenization

Gold tokenization may indeed be a new and easier way for investors to preserve and grow their capital. Many major financial market players, such as J.P. Morgan, have already turned their attention to gold tokenization.

The emergence of gold tokens is possible thanks to distributed ledger technology. During tokenization, an information code is created, which contains the main characteristics of the asset.

Smart contracts automatically execute specific actions when the set conditions are met. Also, when tokenizing gold, the project chooses a gold crypto token standard. The most popular standard on the Ethereum network is ERC-20. It integrates easily with various exchanges and wallets and is suitable for fungible tokens.

In addition to the Ethereum protocol, which is currently the most popular tokenization protocol, the issuance of tokens is also possible on other blockchains. The choice of a suitable protocol for the gold crypto token depends on the project's specifics and legal nuances. If you are in doubt on which blockchain to issue tokens on, we recommend that you seek professional advice from Stobox experts.

Benefits of gold tokenization

Firstly, all the transactions with tokenized gold are conducted on the blockchain. This is a distributed registry that is secure and transparent by default. Each user has access to all entries in this registry and can see all transactions with tokens. Secondly, thanks to smart contracts, the sale and conversion of tokenized gold are simplified.

Another important aspect in transactions with precious metals is the proof of origin. When gold is tokenized, all data is added to an immutable ledger. Thus, at any time, you can see complete information about the supply chain of a gold bar, from the place of origin of the precious metal to processing.

Gold tokenization also boosts liquidity. New technology has made fractional ownership available, which means more people (not only institutional but also retail investors) can invest in gold tokens with a smaller budget.

To summarize the main benefits of gold tokenization:

Tokens are 100% backed by gold, which is kept in a vault;
Provides the ability to perform any operations for the purchase and sale of tokens to other market participants;
Tokenized gold is becoming a convenient way to accumulate capital and long-term investment;
Buying tokens makes investors the direct owners of this precious metal;
It becomes possible to buy gold in any amount.

Existing gold tokens

With the price of gold steadily rising, cryptocurrencies and gold-backed tokens have gained popularity in recent years. These tokens can be traded in some jurisdictions on decentralized exchanges (DEXs). A feature of such tokens is that their value corresponds to the current price of gold.

Below are some examples of tokens and cryptocurrencies available today.

Perth Mint Gold Token (PMGT)

PMGT is one of the most famous examples of gold tokens. It is backed by real gold from the Perth Mint located in Western Australia. The Australian government controls the purity and weight of the gold, and the tokens are indeed pegged to actual gold bars. You can also get a digital gold certificate from the Perth Mint. There are no commissions for storing and insuring gold.

Tether Gold (XAUt)

This is another well-known gold crypto token presented by a project that has previously issued a USD-backed stablecoin. XAUt is pegged to real gold bars provided by TG Commodities Ltd, where one token equals one troy ounce of gold. Gold bars are stored in Swiss vaults; tokens can be split into portions up to six decimal places.

DigixGlobal (DGX)

DigixGlobal is a project from Singapore. Each gold crypto token is pegged to 1 gram of gold stored in vaults in Singapore and Canada. DGX tokens can be exchanged, divided, and traded. However, the company charges a 1% fee for exchanging tokens for real gold.

What could be the future of tokenized gold?

Gold tokenization has already moved from a theoretical concept to actual use. Right now, this technology is improving financial markets, making them more modern and democratic, and offering many opportunities for investors. Thanks to tokenization, gold gains liquidity and becomes available to a wider range of users. Cryptocurrencies and tokens backed by gold are freely traded and can be integrated into any blockchain-based financial service. In addition, the distributed ledger makes all entries as transparent as possible and minimizes the risk of fraud.

If you want to learn more about all the benefits of tokenization and how they apply to your business, please contact our specialists for a free consultation.