Blockchain companies tackling the gold market

Perhaps no other commodity in the world has the universal appeal of gold. For centuries, the precious metal has has been coveted for its unique blend of rarity, beauty, and near indestructibility. Nations have embraced it as a store of wealth and a medium of international exchange, while individuals have acquired it as insurance against the day-to-day uncertainties of paper money.

"For more than two thousand years gold’s natural qualities made it man’s universal medium of exchange. In contrast to political money, gold is honest money that survived the ages and will live on long after the political fiats of today have gone the way of all paper."

• Hans F. Sennholz, Austrian School Economist

Investors also look to the precious metal in order to diversify their investment portfolios. Not only is the precious metal rare, its value often moves against other assets such as equities or property. The World Gold Council (WGC) reported that demand for the precious metal rose sharply in the third quarter of last year, up 27% to 230t. The WGC associated Europe’s strong demand for gold in Q3 2015 with the Greek debt crisis, and the uncertainty faced in Eastern Europe with ongoing tension between Russia and the Ukraine.

“Bar and coin purchases were up by a third on Q3 2014 with Western markets in particular showing a surge. In the US, bar and coin demand reached its highest total in five years, up 207% to 33t.”

• World Gold Council

The precious metal went online in 1996, when e-gold took the world by storm as the first digital gold system. It was often referred to as “Digital Gold Currency,” and at its peak, in 2006, the company was processing spends worth more than US$2b per year.

The platform was unique at the time, being based on an "e-gold Special Purpose Trust" which held title to the physical bullion on behalf of the users. There was a real-time statistical reports page  that showed the total holdings of each metal in the trust account, list of gold bars with serial numbers, the total number of accounts, as well as the total number and value of transactions in the previous 24 hours.

The digital gold company facilitated transactions for more than 5 million e-gold customer accounts. However, just short of its ten year anniversary the operation came to a halt following systemic problems, hacks and fraud. In July 2008 the company and its three directors pled guilty to "operation of an unlicensed money transmitting business" and "conspiracy to engage in money laundering."

Bitcoin and blockchain companies are now vying to establish themselves in the gold market. Bitstamp, a European bitcoin exchange, recently announced physical gold delivery as a withdrawal option. The exchange has partnered with gold trade specialists Moro & Kunst, who work exclusively with Argor Heraeus in Switzerland and The Austrian Mint, Münze Österreich.

“For centuries, gold has proved to be a timeless and exceedingly valuable source of capital preservation due to its unwavering value. Additionally, gold has always been an efficient hedge against the inflation and currency risks.”

• Bitstamp

Although the gold bars are priced in US dollars, FinCEN ruled that tokenizing assets in the United States would result in the company being considered as a money transmitting business (MTB), one of the many issues clarified by the e-gold platform.

Due to this bureaucracy, Bitstamp is only offering the service to the European market, and 28 countries are currently covered. Qualifying users will be able to buy gold bars directly from the firm’s website, ranging from 1 – 1000 grammes, where the price will be updated every five minutes. The bars are then delivered to the owner within two to five business days, with a certified tracking number.

Singapore based blockchain companies are also taking a stab at cornering part of the market, where location provides some key advantages. Singapore law exempts a range of investment grade bullion from Goods and Service Tax (GST), and there is no capital gains tax. Add to this a growing local bullion industry and a government that has no externally owed debt makes the choice clear.

“It is a fact well publicised that Singapore does not have a capital gains tax regime. It helps attract investors to set up their regional hub on our sunny island. Singapore is home to many investment holding companies that are used to hold, manage and control investments in the region.”

– PricewaterhouseCoopers

The first ripple gateway in Singapore was established in 2013, and is by default the first ripple Gold & Silver gateway. Using the ripple network, tokens can be purchased which represent precious metals. For example, 1 XAU represents the right to redeem 1 Troy Ounce of .9999 Pure investment grade gold.

Ripple Singapore operates on a 100 percent backed basis, and enables customers to collect their physical bullion upon demand. “Whilst gold and silver have become increasingly popular assets, there has been far more ‘paper gold’ accumulated than actual physical gold to back it. History teaches us that this always ends badly,” states Ripple Singapore.

“Gold and silver have held their value for thousands of years as the de facto assets to hedge against inflation, currency failure and controls. By holding bullion and only spending it when needed you can mitigate against these risks.”

• Ripple Singapore

Ripple Singapore chose Silver Bullion Pte Ltd, led by Gregor Gregersen, as their trusted bullion supplier and vaulting partner. According to Ripple Singapore, “it is a well established bullion player with an impeccable track record and a strong desire to offer value through innovation and productivity enhancement.”

Silver Bullion’s collection vault is located alongside Certis CISCO, the largest Auxilary Police Force in Singapore, authorized to protect government buildings, banks, embassies and your bullion.

DigixGlobal is also based in Singapore, and recently announced the launch of their gold sales platform. The Digix platform allows gold to be tokenized and documented through its Proof of Asset (PoA) protocol, which uses Ethereum and the InterPlanetary Files System to track an asset through its chain of custody.

“Digix provides a transparent, auditable, and secure protocol that leverages the full potential of Ethereum’s peer-to-peer decentralized consensus system and IPFS permanent document storage to facilitate the creation of transferable crypto assets on the blockchain.”

• Digix

The platform provides asset cards, which consist of information that is permanently uploaded onto the decentralized database. The details will be kept in an Ethereum wallet and include a Time Stamp of the cards creation, SKU of the gold bar, the bar serial number, chain of custody digital signatures, purchase receipt, audit documentation, the depository receipt and storage fees due.

The digital tokens (Dgx) are also held in an Ethereum wallet. Dgx are minted via a Minter Smart Contract and represent 1g of gold which is divisible to 0.001g. “For every PoA card that is sent to the Minter Smart Contract, DGX tokens will be issued in return. For instance a 100g PoA Card sent to the Minter Smart Contract returns 100 DGX tokens to the user,” explains the DigiX whitepaper.

Digix intends to use Bureau Veritas Inspectorate to carry out quarterly checks on the custodian vaults quality and quantity and ensuring accounting is maintained. Gold bullion will also be tested at audit, using instruments such as densometers to measure the density of objects with water displacement.