Euroclear, one of the world's leading settlement houses, is pressing ahead with plans to introduce blockchain-backed gold products, with the goal of delivering reduced counterparty risk, lower capital requirements and increased operational efficiencies.
Euroclear began working with Paxos, a New York-based firm formerly known as itBit, in June 2016 to explore ways of using blockchain to modernize the trading of gold. They have developed a network for clearing, trading and settling bullion trades and performed an initial test last December with 600 trades.
On April 10, the two companies announced that they have processed 100,000 gold settlements using blockchain technology, a significant step up in the amount of processing activity. Sixteen companies participated in the pilot, including Citi, ED&F Man, INTL FCStone, NEX and Société Générale.
"We started with gold for a few reasons," explained Angus Scott, director of product strategy and innovation at Euroclear. "Gold offers a very strong foundation on which to build a new market approach. In particular, the infrastructure of vaults and the quality control around gold bars held within them is exactly what we need in our new model."
Scott, who joined Euroclear in 2012 from HSBC, added that the company believes the gold market is ready to change. "Currently, intermediation in the gold market is balance sheet-intensive for both users and intermediaries, and with the introduction of Basel 3 and other provisions, [it] will become increasingly expensive."
Seth Phillips, an executive at Paxos, added that the tests have proven that the technology “can deliver lower costs and lower risk for the London gold market.”
Euroclear isn’t alone in seeing the advantages of matching gold with blockchain technology. CME Group and the U.K.’s Royal Mint are also eyeing this market. They have created Royal Mint Gold, a digital token that represents one gram of gold stored in the Royal Mint’s vault. On April 11, CME announced that it is testing a blockchain-based platform for trading these tokens with several "major financial institutions" and plans to launch trading later this year.
“This is the first digital gold product that is institutionally targeted, and the first to work with a government entity, to be currently in a live testing state,” said Sandra Ro, head of digitization at CME Group. “An RMG is a digital representation of real gold sitting in the Royal Mint vaults.”
