ETF Giant Challenges Tether and Paxos with Framework for Tokenized Gold

Cryptocurrencies such as Bitcoin offer individuals complete control over their money, but the same cannot be said for assets locked in vaults, according to the World Gold Council.

On Thursday, the trade association, formed and funded by the world’s leading gold mining companies, proposed a framework for addressing the complexities associated with tokenized gold, aiming to set standards for digital assets backed by the precious metal.

In one white paper Co-written by the Boston Consulting Group, the non-profit organization has developed the concept of ‘Gold as a Service’, a platform designed to enable companies creating gold-backed tokens to leverage a shared network to manage physical reserves.

The service seeks to increase trust in tokenized gold through features such as continuous audits, while creating a level of fungibility between products. As of now, companies like Paxos and Tether do dominated who have been in the gold-backed token market for years, have set up their own custodial arrangements and issuance pipelines from the start.

In an interview with DeclutterWorld Gold Council Global Head of Market Structure and Innovation Mike Oswin compared the council’s latest initiative to Intel’s iconic stickers. They are commonly found on Windows laptops and allow consumers to see at a glance that the chipmaker’s processors are embedded in a product, he noted.

“When you see that little symbol, you know it’s Intel,” he said. “You get the best processor, so you know you’re walking out with what you need.”

For the World Gold Council, tokenization also represents the ability to expand its influence into an emerging market following the founding of SPDR Gold Shares in 2004. The first US-listed exchange-traded fund backed by physical gold currently has a market capitalization of $126 billion.

Meanwhile, Tether Gold and PAX Gold have grown to a combined market cap of $4.9 billion since they both debuted five years ago, according to Coin gecko.

Paxos parks reserves for its gold-backed token in London, using vaults operated by security services company Brink’s. Similarly, Tether stores tons of gold for its token in a Swiss-based vault, which once functioned as a A nuclear bunker from the Cold War.

Research conducted by the World Gold Council has found that investors who self-custody their digital assets often prefer to hold the precious metal themselves, Oswin added. This is partly due to the customized custody arrangements that need to be created.

“At the end of the day, [gold] is a physical asset that comes in different sizes, shapes, forms and locations,” he said. “It has always been a barrier to these types of initiatives.”

Unlike stablecoins, which are often backed by cash and U.S. Treasury bonds, gold doesn’t generate income if it’s locked away behind closed doors. Rather, there are costs associated with protecting the precious metal that do not exist for other types of assets in the real world.

Oswin said the council’s service could address the barrier to entry for other companies, which is in line with the World Gold Council’s aim to promote the precious metal broadly.

“Rather than a handful of successful products, this will potentially lead to hundreds of products that can now come to market,” he said. “The business case is made much better by the way they can access the physical gold in a simplified, more cost-effective way.”