Banking giant HSBC has just embarked on the tokenization of gold, allowing the precious metal to be invested and traded digitally.
HSBC has just launched a “token” that represents a fixed, predetermined amount of physical gold, providing a digital way to access and trade the precious metal.
The tokenization of gold by HSBC is in itself a small revolution. Not just for UK banking but for the financial industry as a whole. Indeed, this approach is part of a broader trend of digital transformation of the entire industry. By tokenizing gold, HSBC is bridging the gap between traditional finance and digital finance. This initiative could potentially revolutionize the way gold is managed, traded and integrated into financial portfolios.
HSBC is not the first institution to try this experiment, since the blockchain platform “Tether” has long offered Tether Gold (XAUt), its digital token backed by physical gold and whose market capitalization exceeds $550 million. Pax Gold (PAXG) is a gold-backed cryptocurrency issued by Paxos, a regulated blockchain infrastructure. The Paxos gold token has a capitalization of $435 million. Unlike Tether Gold and pax Gold, HSBC’s token is currently only available to the bank’s customers.
The implications of gold tokenization are far-reaching for investors and the banking industry as a whole.
Image Source: Aurus.io.
For investors, gold tokenization reduces barriers to entry (via “fractionalization”) and increases market liquidity, which opens up new opportunities for portfolio diversification.
Tokenization also enables the generation of returns on physical gold.
But above all, it allows you to trade gold 24/7. Let us recall on this subject that during the drone attack carried out by Iran on Israel, the digital gold tokens already available on the market (example: Tether Gold and Pax Gold) had reached a value equivalent to 2,900 dollars l ounce of gold during the night from Saturday to Sunday. Physical gold prices and gold ETF prices had not fluctuated since traditional stock exchanges are of course closed on weekends.
For the banking industry, this means a step forward towards adopting blockchain technology and creating new financial products. These developments could very well reshape the global financial market, as tokenized assets enable transparent global transactions, with reduced costs and increased efficiency.
Understanding tokenization
Tokenization is the process of converting real assets into digital representations on a blockchain. This process allows assets to be exchanged, transferred and managed digitally. These tokens are a digital representation of ownership, with each token corresponding to a specific asset, whether gold, real estate or other commodities.
Source: HSBC.
This is referred to as fractional ownership, which means that a gold bar represented by HSBC gold tokens can be held by more than one investor simultaneously. In this case, the unit of exchange is the troy ounce, with each HSBC gold token representing the fractional ownership record of 0.001 troy ounce, or approximately 0.03 grams.
Blockchain technology enables this tokenization process. It is essentially a decentralized digital ledger that records transactions securely. These blockchains run on a network of computers, ensuring that no single entity controls the data. Blockchain is an ideal platform for managing tokenized assets due to its decentralized structure that allows transactions to be recorded transparently and immutably. For HSBC, all gold tokens will be recorded on an internal private ledger using distributed ledger technology operated by the platform operator (also HSBC).
Source: HSBC.
Tokenization offers several key benefits, the most obvious being liquidity. Assets such as gold, real estate and other traditionally illiquid assets can now be traded faster and more freely. Through tokenization, assets can be represented by millions or billions of digital tokens, making it easier for investors to buy and sell these assets on various easily accessible exchanges, increasing market liquidity. It also helps expand the pool of potential buyers and removes the need for costly transactional intermediaries.
Another key advantage is accessibility. Due to regulatory or financial restrictions, many assets with the greatest upside potential are not accessible to retail investors. Investing in high-end art, collecting sports vehicles which increase in value or buying and renting collective buildings are just a few examples of investments with high performance potential but access to which is difficult. Tokenization makes this type of investment accessible to a wide audience.
Additionally, a common problem with high-value assets is the lack of easily accessible and reliable data on returns, ownership, saleability, and other important criteria that investors need to know to make informed financial decisions. Since many blockchains are inherently public, tokenization has the advantage of allowing tracing of all this past information. For some, this is even the most attractive attribute of blockchain technology. A recent proponent of the use of blockchain technology is independent presidential candidate Robert F. Kennedy Jr. who recently said: “I’m going to put the entire budget of the United States on the blockchain so that everything American – every American – can consult each budget item of the entire budget at any time, 24 hours a day. According to the logic of the smart contract, tokenization allows users to view the history of ownership of an asset (in addition to past performance or returns).
HSBC’s bet on digital assets
HSBC’s interest in digital transformation is not new as HSBC had already publicly recognized the potential of digital assets and blockchain technology. The bank has regularly invested in projects aimed at using blockchain to revolutionize financial services such as international trade financing and securities transactions.
With this strategic move, the bank aims to position itself at the forefront of digital innovation, diversifying its financial product portfolio and simultaneously creating seamless access to gold trading for its clients.
Other major banks are also exploring the possibilities offered by digital assets. For example, JP Morgan launched its JPM Coin in 2019, which facilitates cross-border payments using blockchain technology.
These initiatives are representative of the industry’s recognition of blockchain’s ability to streamline traditional financial systems by making them more efficient and accessible. Asset management giant BlackRock is another industry leader that has recently been in the news about tokenization. In March, BlackRock unveiled a new real-world asset (RWA) tokenization fund, called BUIDL, on the Ethereum network. BlackRock’s BUIDL has become the largest tokenized treasury fund with over $375 million in assets under management, surpassing Franklin Templeton’s OnChain US Government Money Fund.
Gold tokenization
Gold tokenization involves a multi-step process that combines technology and finance. It all starts with sourcing and storing gold. HSBC ensures that physical gold is secure in its vaults in England and Wales, with each unit of gold having a corresponding digital token that represents ownership.
Given the newness of this industry, regulatory considerations are crucial when tokenizing gold. The financial sector must ensure compliance with ever-changing global regulations, including anti-money laundering (AML) and know-your-customer (KYC) requirements. These measures help prevent illicit activities and ensure the legitimacy of tokenized gold markets. This also means that regulators are responsible for creating frameworks that account for the specific aspects of blockchain and digital assets, striking the right balance between innovation and protection of investors and markets.
Market acceptance is one of the main barriers to mass adoption of digital assets. Despite the growing popularity of digital assets, skepticism remains high among investors and traditional markets. Surveys by the Pew Research Center show that 75% of Americans who have heard of cryptocurrencies do not have confidence in their security and reliability, with 39% saying they have no confidence at all. At the other end of the spectrum, only 6% said they were very/extremely confident in the reliability and security of cryptocurrencies. To overcome this difficulty, HSBC must build confidence in its tokenized gold offering and demonstrate its legitimacy and value to its potential investors. These efforts will likely need to include educational initiatives to educate customers about the benefits of tokenization and how the technology works.
Technical issues are another potential obstacle. As blockchain technology is still evolving, scaling its infrastructure while maintaining security is no easy feat. HSBC must ensure that its tokenized gold supply is secure, reliable and can handle growing demand without compromising performance.
Conclusion
Tokenized assets are set to play an important role in global finance and expand beyond gold to encompass diverse asset classes, with some even predicting a future in which all stocks, bonds, funds and real assets are tokenized . Large banks and financial institutions play a crucial role in shaping the future of tokenized assets. As institutions increasingly adopt blockchain technology and integrate it into their offerings, they bring stability to this emerging market and, above all, legitimacy. Additionally, their involvement helps establish regulatory frameworks and industry standards, thereby ensuring the security and reliability of tokenized assets.
Source: Halborn.
