"Digital gold" is coming too?

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The World Gold Council is seeking to launch digitized gold, creating a brand new model for precious metals trading, settlement, and collateralization—a move that could completely reform London’s $900 billion physical gold market.

On Wednesday, World Gold Council CEO David Tait said in an interview with the Financial Times that although many investors value gold precisely for its physical characteristics and lack of counterparty risk—seeing it as a safe-haven asset—gold must be digitized to expand market reach. This new digital unit, called "Pooled Gold Interests" (PGIs), will undergo a pilot with commercial participants in London in the first quarter of next year.

Gold hit a record high this week, doubling in value over the past three years. However, for most banks and investors, gold remains a static, non-yielding asset on their balance sheets. Digitized gold can be used to meet margin requirements and serve as collateral, realizing value-generating uses.

However, the current plan faces market resistance, as the gold market is dominated by vested, risk-averse interests. Adrian Ash, Research Director of gold trading platform BullionVault, questioned whether London’s wholesale markets would adopt this innovation, saying, “It looks like a solution in search of a problem.”

Digitized Gold Targets $9 Trillion Collateral Market

The World Gold Council’s "Pooled Gold Interests" will allow banks and investors to buy and sell fractional ownership of physical gold stored in segregated accounts. The framework relies on a small group of core participants collectively owning the underlying gold within a trust structure.

Tait pointed out:

From a collateral perspective, banks will benefit greatly because they gain the opportunity to use gold on their balance sheets as collateral. We’re working to standardize gold’s digital layer, enabling a variety of financial products used in other markets to be applied in the gold market.

This pilot project will include “major banks and trading companies” as co-owners of the underlying gold, confirmed by Allan Guild, founder of project advisory firm Hilltop Walk Consulting.

London Market Seeks a Third Trading Mode

The “London local” wholesale gold market is the world’s largest physical trading hub, supported by large holdings from commercial banks like HSBC and JPMorgan as well as the vault capacity of the Bank of England, and operates in an “over-the-counter” model.

Currently, there are two types of transactions in the London market: “allocated” gold trades involving specific gold bars, and “unallocated” trades that do not specify particular bars. According to a white paper published Wednesday by the World Gold Council and law firm Linklaters, the proposal would create a third type of transaction for London’s OTC gold market.

This is the latest step in the World Gold Council’s multi-year project to digitize the gold market. Earlier this year in January, it launched a blockchain database for refineries and gold bars.

Challenging Cryptocurrency and Stablecoin Competition

Despite surging gold prices, industry insiders believe one of the world’s oldest assets faces the risk of being overtaken by competitors such as cryptocurrencies and stablecoins pegged to traditional assets.

So far, most attempts to create gold-backed stablecoins have ended in failure. Currently, the two most successful gold stablecoins—Tether Gold and Pax Gold—manage about $1.3 billion and $1 billion in assets respectively, while gold-backed exchange-traded funds hold $400 billion.

Some market participants say such efforts may face obstacles because the gold market is dominated by deeply entrenched, risk-averse existing participants.

The blockchain database “Gold Bar Integrity Program,” launched in January this year by the World Gold Council in conjunction with the London Bullion Market Association representing gold-trading banks, has been relatively slow. However, LBMA CEO Ruth Crowell said that acceptance among refineries is “very strong,” with 96% of Good Delivery List refineries having joined.

Tait acknowledged the process can be difficult at times, but still believes it can transform how gold is sourced. He said: “As the database becomes ubiquitous, everyone will use it… Every bar will ultimately have its own passport, its own birth certificate.”

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