Despite the crypto winter and general uncertainty around digital assets, we’re continuing to see the emergence of real-world asset tokenisation as defi continues its creep into financial services. Artwork, intellectual property, real estate, corporate securities,
luxury cars, commodities, and gold, are some examples of this tokenisation.
Last week,
HSBC unveiled a platform that uses distributed ledger technology (DLT) to tokenise the ownership of institutional clients’ physical gold held HSBC’s London vault.
During its tokenisation process, HSBC creates a ‘digital twin’ of an existing physical asset - specifically loco London gold that is custodied in its vault. The tokenised physical gold can then be traded between HSBC and institutional investors through the
bank's Evolve single dealer platform, or through an API.
The tokenisation generates a permissioned digital representation of clients’ physical gold holdings, which is integrated into HSBC’s operational infrastructure, including Evolve. This provides a digital overlay for clients to see their tokenised gold trades
and positions that correspond with their physical holdings. This creates an automated and more efficient, cost-effective way for investors to keep track of their allocated and unallocated gold.
On the announcement, John O’Neill, global head, digital assets strategy, markets and securities services, HSBC, said: "In addition to demand for native digital assets, we are seeing appetite for tokenisation solutions that can maintain a link to specific
real-world use cases, such as gold."
What is gold tokenisation?
According to
Chainlink, gold tokenisation involves minting digital tokens on a blockchain to represent ownership rights of physical gold bullion or coins, which are typically custodied in a vault by a third party.
What is the gold tokenisation process?
The gold tokenisation process involves converting physical gold into digital tokens on a blockchain or digital platform. Key steps are as below:
- Custody: A trusted entity holds and stores physical gold in secure vaults.
- Token Creation: Each unit of physical gold is represented by a digital token, often on a blockchain.
- Verification: The gold's authenticity and ownership are verified and recorded.
- Tokenisation: Tokens are issued, backed by the gold's value, and can be traded or held electronically.
- Transparency: Blockchain records provide transparency, allowing investors to verify the gold's existence and ownership.
- Trading: These tokens can be bought, sold, or used for various financial purposes, offering flexibility and access to gold investments in digital form.
How is gold tokenisation different from a gold exchange-traded funds (ETFs)?
Gold tokenisation involves the digitisation of physical gold into tokens on a blockchain, providing more direct ownership and potential transparency. Gold ETFs represent ownership in a fund that holds physical gold, offering indirect ownership, and they
are traded on stock exchanges. Both have different custody, liquidity, transparency, and cost structures.
Is it possible to buy gold from HSBC?
Through the HSBC Evolve single dealer platform (or through an API), tokenised physical gold can now be traded between the bank and institutional investors through the HSBC Evolve single dealer platform, or through an API.
Is tokenised gold safe?
Gold has long been known as a safe haven asset, retaining value through economic downturns, but would this be the same for tokenised gold?
As a spokesperson for Tether Gold told
Niamh Curran, senior reporter, Finextra, wrote earlier this year, “Gold has a long history as a store of value. Unlike fiat paper currency, coins or other assets, gold has maintained its value throughout the ages.”
“It seems that gold-linked digital assets are something which can provide some feeling of stability from the markets, but especially in for those of digital assets. For traditional investors and even the newer generation, crypto can be too much of a risk
for their investment. Tying these to gold might hedge that. Tether Gold argues: "People see gold as a way to pass on and preserve their wealth from one generation to the next. Tether Gold holders seek these intrinsic benefits of the metal as a store of value
along with other highly desirable features that come from tokenisation."
Tokenised gold carries various risks, including market volatility, regulatory uncertainties, counterparty and custody risks, potential liquidity challenges, security threats, technology vulnerabilities, diversification concerns, and redemption limitations.
While smart contracts and clear record of transactions are available on blockchain, proving ownership of real0lief assets remains a key concern. Additionally, there are still many unanswered questions around what will happen when investing in tokenised gold
is made available to the masses. Not only are there technological and security risks to consider, but widespread investment in the asset could also impact its underlying value.
Earlier this year, the
US Federal Reserve published a paper that examined the broader financial stability implication of tokenisation. The paper highlights the interconnectedness of the digital asset system and financial markets, with risks including:
- Firesales in tokenised markets impacting TradFi markets
- volatility from crypto markets transmitted to underlying reference assets
- concerns around under-collateralisation triggering a run
- a mismatch between 24/7 token trading versus TradFi trading hours in stress events
- DeFi automated margin calls triggering liquidations
- tokenisation (like securitisation) masking the risks of underlying assets.
It's essential to exercise due diligence, select reliable providers, consider regulatory developments, and maintain a diversified portfolio.