ETF Giant Challenges Tether and Paxos With Framework for Tokenized Gold

Cryptocurrencies like Bitcoin offer individuals complete control over their funds, but the same can’t 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 complexities tied to tokenized gold, with the aim of establishing standards for digital assets backed by the precious metal.

In a white paper co-authored by Boston Consulting Group, the nonprofit established the concept of “Gold as a Service,” a platform designed to allow companies creating gold-backed tokens to tap into a shared network for managing physical reserves.

The service seeks to bolster confidence in tokenized gold through features like continuous audits, while establishing a level of fungibility across products. As of now, companies like Paxos and Tether, which have dominated the market for gold-backed tokens for years, have established their own custody arrangements and issuance pipelines from the ground up.

In an interview with Decrypt, the World Gold Council’s Global Head of Market Structure and Innovation, Mike Oswin, compared the council’s latest initiative to Intel’s iconic stickers. Commonly found on Windows-based laptops, they enable consumers to see that the chipmaker’s processors were embedded in a product at a glance, he noted.

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

For the World Gold Council, tokenization also represents an ability to extend its influence into an emerging market after establishing SPDR Gold Shares in 2004. The first U.S.-listed exchange-traded fund to be backed by physical gold currently has a market cap 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 CoinGecko. 

Paxos parks reserves for its gold-backed token in London, using vaults that are managed by security services provider Brink’s. Similarly, Tether houses tons of gold for its token in a Swiss-based vault, which once operated as a Cold War-era nuclear bunker.

Research conducted by the World Gold Council has indicated that investors who self-custody their digital assets often prefer holding onto the precious metal themselves, Oswin added. That’s partly because of the bespoke 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, locations,” he said. “It’s always been an inhibitor to these kinds of initiatives.” 

Unlike stablecoins, which are often backed by cash and U.S. Treasuries, gold doesn’t generate income when it’s tucked away behind closed doors. Rather, there are costs associated with safeguarding the precious metal that don’t exist for other types of real-world assets.

Oswin said the council’s service could address that barrier to entry for other firms, which is in line with the World Gold Council’s goal of promoting the precious metal broadly.

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