How Can Gold Tokenization Transform the Financial Industry?
19 January, 2021
Tokenization can radically transform the way we invest in assets. With the help of blockchain technology, it’s possible to tokenize almost everything, from real estate to precious metals and even works of art. The tokenization process will undoubtedly lead to a brighter future, as it encourages the creation of a more inclusive financial system.
With the advent of tokenization, the way we own and trade real-world assets can be completely revolutionized. Believe it or not, we all can become dexterous investors and start making money once we learn how to tokenize assets properly and understand what is worth putting money into.
What can you tokenize? Well, there are plenty of options available: private equity, real estate, fine art, diamonds, football teams, arenas, etc. However, it will come as no surprise that the most universally precious and safe-haven asset, even in the most severe crisis, is gold.
In this article, we will find out more about why it’s a good idea to tokenize gold, what stands behind the concept of tokenization, and what benefits it can bring.
Asset tokenization is about converting real assets into digital ones by issuing security tokens that are registered on a blockchain. These digital tokens represent real tradable assets. Both tangible and intangible assets can be converted into their digital counterparts that constitute the underlying value of assets. By tokenizing any assets and putting them on a blockchain, anyone will be able to own fractions of whatever securities they desire.
Asset tokenization provides several purchasers with access to an asset, the price of which would be extremely high otherwise — this is the so-called fractional ownership. Tokenization welcomes a higher number of smaller investors, which results in a greater inclusive market and more sales without lowering original prices. What’s more, given that tokens correspond to the value of a certain underlying asset (a company share, oil, gold, etc.), their trading capacity coincides with that of real securities. When the traditional asset’s price rises, so does its tokenized counterpart, and the same applies when the price drops.
The use of distributed ledger technologies, as well as smart contracts in asset tokenization, offers a number of advantages such as process automation and disintermediation. As a result, tokenization becomes completely transparent, faster, and more efficient, while assets themselves acquire improved liquidity and tradability. Asset tokenization will also contribute to a more inclusive global market and lower barriers to investment.
What can be tokenized?
Companies all over the world are taking advantage of asset tokenization and converting their equity shares to security tokens, as it helps overcome trade barriers. Just as importantly, it’s a smart way to raise capital.
As of today, it’s possible to tokenize almost anything you want. Below, we provide just some examples.
In the loan tokenization process, a loan is split via the creation of tokens that can later be traded on a secondary market.
The benefits that loan tokenization offers comprise cost reduction and broader market participation. In addition, mundane and complex manual processes, as well as lengthy settlement times, will be totally eradicated.
Real estate tokenization implies creating a digital asset that represents a single property or a portfolio of properties on a distributed ledger technology (DLT) system. The types of real estate that can be tokenized include single-family or multi-family homes, office buildings, warehouses, retail spaces, and the like. Tokenizing real estate will increase market participation and generate more capital.
The tokenization of physical goods contributes to more advanced tracking of origin, ownership, and authenticity of these assets. Among physical goods that can be tokenized are such assets as works of art, aircraft leases, medical and electronic devices, pharmaceuticals, food and beverages, cars, coffee, and various collectibles.
Сopyright tokenization creates new and extraordinary models for fractional ownership of various artistic projects. It enables musicians, artists, singers, for example, to issue tokens on a digital blockchain platform that represent shares of copyright in their work. Investors can easily purchase these tokens on a secondary marketplace by simply signing a smart contract on an online tokenization platform, and then acquire equity in the copyrighted project.
Yes, we know that it sounds unbelievable, but welcome to the 21st century, where almost everything is possible (apart from the creation of a device that would help determine when an avocado is ripe enough to consume).
But let’s get back to sport, though…
The tokenization of sports teams allows eager fans, sponsors, communities, and other interested parties to invest in their favorite clubs, teams, arenas, and athletes. This will contribute to the growth and development of professional sports franchises and the creation of new economic opportunities.
Gold as a valuable asset
We have touched upon only some of the assets that can be tokenized, but bear in mind that the range of opportunities is much broader.
However, it would be quite reasonable to assume that you are interested in investing in an asset that is more universally valued. This asset is not hard to find – it’s gold, the metal that people normally fall back on when other currencies fail.
It comes as no surprise that gold is considered to be an ideal asset. Throughout the centuries, it has played a key role in the financial system and has been a symbol of wealth and status up to this day.
Gold is chemically stable, malleable, certainly rare, and universally precious. Whenever the world economy experiences financial or geopolitical downturns, gold still manages to retain its value. This precious metal is also an amazing hedge against inflation, as its price usually rises when the cost of living goes down.
In situations like the coronavirus crisis and the unparalleled monetary response, many investors have switched to hard assets such as gold bars. Business analysts predict that gold’s desirability will be boosted even more and achieve an all-time record level.
Challenges in today’s gold market
There used to be a time when both institutional and retail investors were not so easy to persuade to start investing in gold. The reason for this lies in the fact that most processes connected with buying, selling, and transferring gold assets have been too outdated, lengthy, and, basically, manual, which can lead to errors and influence market liquidity.
Additionally, the size and weight of physical gold pose a considerable challenge, as gold bars are difficult and slow to transport across long distances, expensive to store, and not easily divisible. Another aspect to take into account is that gold must be professionally measured to assess its purity and integrity, which requires additional services of technical experts.
Luckily, thanks to tokenization, these issues have been successfully resolved, and now we will explore the benefits that this procedure offers.
Gold tokenization can indeed bring substantial benefits to its investors. Many financial industry giants, like J.P. Morgan, one of the largest banks in the USA, have already drawn attention to this extraordinary method of investing in gold.
What benefits can gold tokenization offer?
The first thing that is important to mention is that all transactions are carried out on a blockchain infrastructure. It is secure by default — therefore, gold tokenization can boast increased transparency regarding both transactional and issuer data. Greater transparency also means improved traceability and allows a user to review the history of all transactions relating to the asset.
What’s more, as smart contracts are extensively used in the gold tokenization process, tokenized gold is easy to trade and convert. Programmable gold provides new functionality in the trading world.
As well as the advantages outlined above, gold tokenization also encourages asset fractionality that enables participants to own and perform activities over just a part of an asset. This leads to better liquidity and the involvement of more people. Besides, it will enhance market inclusiveness and attract more small and retail investors (not only large institutional investors and funds).
Tokenization ought to do away with all the manual processes as well, making it possible to complete various procedures with gold within seconds instead of hours or even days!
Technical aspects of gold tokenization
The whole tokenization process is based on the distributed ledger technology that is responsible for creating a digital representation of gold.
To tokenize gold, it is important to build an informatic code that will represent the main characteristics of the asset while offering other functions that will allow a user to interact with the digital representation of gold. On the Ethereum blockchain, for example, this code can be developed in Solidity.
Smart contracts have their part to play, too. They ensure that transactions eradicate any possible error and the system operates just as programmed. However, smart contracts always have to remain composable so that, for example, when a new project issues a token, it has to be compatible with the existing decentralized changes.
Before tokenizing gold, it’s also necessary to consider such a thing as a token standard. The functionality and wallet compatibility of a security token is determined by a certain standard that comprises predefined functions and/or other attributes that are purposely integrated to represent the specifics of an asset.
The most prominent token standard in the Ethereum ecosystem is ERC-20. ERC stands for Ethereum Request for Comment. It allows developers to create tokens quickly and without much fuss. In addition, it provides better integration with wallets and various exchanges. ERC-20 standard is suitable for fungible tokens like Ether, Augur, etc. By following the standard ERC-20 protocol, numerous Ethereum-supporting exchanges along with wallet applications already possess in-built support for viewing and transferring token’s assets.
So far, we have looked into the Ethereum protocol, which is a nice option for the retail industry. However, there is a much wider range of protocols available, and each of them addresses particular aspects. The choice of a suitable protocol largely depends on the legislation and your specific requirements. In case you are in two minds as to which protocol to select, we strongly advise you to thoroughly study all the options available or reach out to experts in this domain for a professional consultation.
Changes in the value chain
The tokenization process brings changes to the securities trading value chain, making it possible for new market participants to easily enter the token economy. Given that blockchain allows users to share their data, several business participants of an ecosystem can interact with one and the same digital representation of gold. This in turn contributes to greater efficiency across the value chain and allows for new means of cooperation.
Just as importantly, financial institutions will have a chance to choose themselves what role to play in the value chain. For instance, they can choose to act as consultants to advise issuers on how to structure their tokens, or they can serve as custodians of assets. One more function that they will be able to perform is helping customers maintain their accounts in cryptocurrencies and tokens, and even act as central distributors, enabling their clients to trade on different tokenization platforms or token exchange.
In short, the goal of tokenization is to create interoperability within the existing systems to encourage its more widespread adoption. All participants in the value chain can get closer to one another and come up with new ideas to introduce new DLT-related businesses into the traditional financial sector.
Risks and obstacles associated with gold tokenization
Even though gold tokenization enjoys considerable benefits, it still involves some risks.
First of all, there’s a scarcity value. Gold is hard to find and mine. If a huge supply of gold were tokenized at once, it would exert a dramatic impact on the market price of gold. Yet, it’s difficult to predict such a situation until it actually happens. There are also some concerns about the risks of hacking a digital asset along with hyper-liquid market stability.
Some investors are also preoccupied with the idea of how a security token will remain linked to their real gold asset. For example, a situation may occur (*touch wood*) where someone owns a small fraction of 50 gold bars in a bank, and somehow 10 of them get stolen. In this case, the token’s value is undermined if nothing can prove that they are linked to the real assets.
Nevertheless, these fears and obstacles can be overcome if a tokenized-gold-investor-to-be resolves all the worrying issues beforehand and eliminates risks by hiring a professional team who will be responsible for tokenizing the asset.
The existing gold-backed cryptocurrency tokens on the market
Gold-backed cryptocurrency is viewed as a kind of cryptocoin where each token is backed with physical gold and its price is correlated with the current gold price. A number of jurisdictions allow individuals to carry out transactions using these tokens through decentralized exchanges (DEXs).
As of today, gold prices have been soaring. This has stirred up a keen interest in the market for gold-backed cryptocurrency tokens that have the potential to make cryptocurrency more stable. Below, we provide a brief description of just five (out of dozens) gold-backed cryptocurrencies.
DigixGlobal was introduced by the eponymous Singapore-based company. Each DGX token represents 1 gram of gold that is held in vaults in Canada and Singapore. DigixGlobal tokens are tokenized digital representations of gold bars that are redeemable and divisible as well as transferable. Once you decide to trade DGX coins, remember that the DigixGlobal company charges a 1% fee for trading their tokens for real gold.
Gold Coin (GLC)
The Gold Coin gold-backed cryptocurrency is fractional, which actually means that 1 GLC coin equals 1 gram of a gold fraction. This makes the entry barrier for Gold Coin very low. Gold Coin is based on the Ethereum blockchain and has had a good reputation among financial market participants for many years already.
Perth Mint Gold Token (PMGT)
The Perth Mint Gold Token is considered to be one of the best gold-backed cryptocurrency tokens. It is backed by actual gold blocks from the Perth Mint located in Western Australia. The Australian government assures PMGT users of the purity and weight of the gold, which makes this cryptocurrency valid. Moreover, the Perth Mint provides special digital gold certificates that back PMGT tokens via the GoldPass app. PMGT doesn’t charge any fees for insurance, custody, or storage.
Meld Gold is an Australian-based tech start-up that has collaborated with Algorand, a blockchain protocol, intending to create decentralized gold tokens. Meld Gold intends to completely transform the way people buy and sell gold by introducing their robust digital platform to the existing supply chain. This platform will allow investors to carry out transactions with virtual gold tokens and physical gold.
Tether Gold (XAUt)
Tether, the most prominent issuer of a USD-backed stablecoin, has released their gold-backed token called XAUt. Tether Gold is pegged to physical gold (XAU) and is provided by TG Commodities Ltd. Each Teather Gold token represents 1 troy ounce of gold on a London Gold Delivery bar of gold. Tether keeps its gold reserves in Swiss vaults. XAUt tokens can be fractionalized up to six decimal places. Tether has its tokens reside on such blockchains as Ethereum and TRON.
Perspectives on tokenized gold
Gold tokenization is not about the future – it is the present. It has already exerted a transformative impact on financial markets, made them more democratic, and offered a range of exciting opportunities for those who want to start investing. Tokenized gold brings in a new era, with gold-backed cryptocurrencies capable of being integrated into any DLT-based or financial service.
Once gold used to have a poor reputation in the eyes of investors, as they were frustrated with its lack of utility. However, thanks to tokenization, gold has risen in esteem and is now available to a wider range of investors.
Moreover, DLT makes the transparent recording of complex transactions possible. This eliminates any possibility of fraud and is ideal for the gold tokenization business.
How to tokenize an asset
Asset tokenization has proven to be a real game-changer for different markets, and many investors have started considering the idea of tokenizing either real-world assets or intangible items. But it’s important to mention that the process of creating and managing tokenized assets is complicated and requires a number of things to be taken into account. Below, we outline the stages that comprise the asset tokenization process.
First off, you need to find out what asset is worth tokenizing and whether it has a sizable market. It’s advisable to choose a widely traded asset (gold or other precious metals). If you wish to tokenize something else, you should ask an auditing or consulting firm to do a valuation for you.
The next step is to determine your business model. This will have to reflect on how your tokenized platform will function. You will need to detect revenue sources and a customer base as well as tackling the financing aspects. Furthermore, as a central distributor, you will be responsible for granting access to carry out transactions on different tokenization platforms or maintaining user accounts on cryptocurrencies.
You are also advised to create whitepapers to inform your potential investors why the token was created and what the platform is capable of. It should include some technical specifications as well as the design and a proposed prototype.
This part can be fraught with difficulties. That’s because your blockchain network won’t be able to exist without any legal regulations once you attach tokens to real-world assets.
The most optimal solution to the problem is to take care of the issue in advance and consult with an experienced legal adviser. There may be a lot of minutiae to attend to, which is why you’re better off delegating this to the professionals.
Moreover, it’s essential to consider a host of facets when choosing jurisdiction for gold tokenization.
Regulated jurisdictions are becoming the norm, as there is a growing demand for better investor protection and legal clarity for the innovative crypto assets space. The scandals and mishaps of the past have forced users to be more sensible and careful while choosing jurisdiction for gold tokenization. But how to know that this or that jurisdiction is the most suitable one for you? There are many aspects to focus on, e.g. blockchain legislation, taxation, vaulting facilities, etc. Definitely, you’ll have to spend a decent amount of time gathering, analysing, and comparing loads of information about various jurisdictions. But in the long run, you can be a hundred percent certain that you’ll make the right choice.
This stage is by rights considered the most important, and is a multi-step process. Here, you will have to deal with some significant aspects such as smart contract generation, MVP development, etc. It’s extremely important to trust the technical part to an experienced team that will consider all your requirements and deliver the best solution possible.
Initially, it all revolves around generating smart contracts that are an inseparable part of tokenization. During this stage, you will also have to fathom out how many tokens you are going to distribute to interested investors.
As well as this, you won’t be able to do without an MVP (Minimum Viable Product). An MVP allows you to test your new platform and see what needs to be added and/or improved. Once you have received and processed all the feedback from your MVP users, it’s time to get down to building your product.
During the tokenization process, you should also think about cybersecurity measures. Though DLT implies a high level of security, some weak points may still exist. With this in mind, try to secure the whole value chain and plan cybersecurity at various levels, from infrastructure to applications.
Surely, there are many other steps to consider when tokenizing your asset but these ones prove to be the most essential.
Gold itself has always been an attractive way to invest and earn money. The 21st century has opened up a new way of investing called gold tokenization, which is already transforming financial markets and making gold available to a wider range of investors.
By and large, launching your asset in the blockchain environment will attract more investors, increase an asset’s liquidity, considerably reduce the time needed to carry out transactions, and make those transactions safer and quicker. Yet, to ensure that the tokenization process will be trouble-free and efficient, you should turn to an experienced and professional partner for help.
Our Security Token Offering (STO) Platform provides out-of-the-box features to accelerate and streamline these processes. You can easily digitize any asset and back it up with a complete ecosystem of services for running your STO campaign. We can also customize your tokens and STO platform parameters to meet your business needs.
Let us help you engage with the technology and enter a new and fascinating tokenized world!
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