Before understanding how blockchain can change the way we trade gold, one must first understand how it can impact global commodity trading. ‘How Is Blockchain Changing the Commodity Trading Industry?’ Trade Finance Global notes that the process involved in global commodity trading is slow, because of the need for the physical exchange of pertinent documents. This process can be extremely long in cases when distance is a factor, when documents need to be delivered from, say, New Zealand to Geneva, where major trading houses are registered.
Enter blockchain, which allows parties a fast, convenient, and simultaneous way to view transactions, from trade confirmation to actual delivery. This capability drastically reduces trade time, and could potentially even eliminate the need for intermediaries, like trade houses (thereby reducing accompanying costs, too). Just as important, blockchain can authenticate transactions, as well as protect them from tampering, which ensures that the trade is completed by the transacting parties and no one else.
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Blockchain can ensure borderless, fast, and safe trading. The process will potentially be as simple as recording a transaction in a secure virtual ledger. Coincidentally, this process has already been implemented in trading commodities like precious metals, in particular gold. The Bloomberg op-ed ‘How Blockchain Could Revolutionize Commodity Markets’ begins by pointing out how blockchain “has already been adopted by gold traders.” The piece then notes that blockchain opens up gold trading to all market participants, including miners and refiners, wholesale traders, financial institutions, investors, and the retail sector.
To date, one can own physical gold as a digital asset, to be “kept” in a digital wallet and traded to another trader’s digital wallet. This is possible via the Royal Mint Gold blockchain token developed by The Royal Mint and the Chicago Mercantile Exchange. It is a digital asset token tied to the physical gold kept at the Royal Mint in England. Other blockchain-based gold trading platforms are also being established at the moment, including ones developed by Euroclear and GoldMoney.
While blockchain-based gold trading is still in its infancy, it could soon be a valuable method among traders who currently trade gold through traditional means. The FXCM gold trading markets post, explains that in the US, gold is traded as derivatives (either as futures or options) or exchanged over the counter through the New York Commodities Exchange. Gold traders in other countries have alternatives, like trading gold as a spread bet where the trader can speculate on the price of gold. But Coindesk suggests that these traditional trading options are clouded by scepticism due to price fixing and doubts about the authenticity of the gold being traded. Blockchain removes these aspersions because (a) it offers a near tamper-proof mechanism to keep track of gold along the entire supply chain, from mining to distribution; and (b) it decentralizes the trading process, giving traders the opportunity to monitor gold prices in real time.
Fortune calls blockchain-based gold trading the “tokenizing” of precious metals. It is an apt description since this innovation turns gold into virtual digital tokens. Unlike virtual currencies like Bitcoin, these tokens have actual, physical value, and will make trading gold faster, easier, and safer. Just as important, this innovation will open up gold trading to more people, with the yellow metal digitally spliced into smaller denominations for more investors to own.