London Grapples with Blockchain to Safeguard Gold Trade Dominance

London's gold trade has been around for centuries and is currently at risk due to shifting demand towards Asia. To protect its dominance, the UK's Financial Conduct Authority (FCA) is working on a framework for 'tokenised' gold, where digital tokens represent ownership of physical gold held in vaults.

The current system involves two main ways institutions hold gold: unallocated and allocated. Unallocated gold allows large quantities to be bought and sold without identifying, moving or storing specific bars, but comes with credit risk. Allocated gold provides a better property right and separates ownership from the custodian's financial health.

The FCA is exploring 'tokenised' gold, where ownership of physical bullion is divided into digital tokens. This concept has already been tested in London's gold market through platforms like HSBC's Evolve, which creates digital representations of physical gold held in its vaults. Tokenisation could give London an advantage by allowing it to modernise the way gold is traded without giving up existing infrastructure.

The technology also increases collateral mobility, making it easier for banks to move assets and use them as collateral. However, this raises concerns about leverage around gold and potential risks of rehypothecation. Regulators will need to ensure that digital representations match the physical gold stored in vaults.