Do’s and don’tsof physical gold ownership in a digital economy
By Marleen Evertsz,
Published on Aprile 5, 2020
It suddenly seems like a new reality. Who could have predicted at the beginning of this year that almost all of us would work from home just when spring starts? The markets have shown enormous losses in recent weeks. A shock to the financial system. The Covid-19 virus has plunged the world into an unprecedented crisis.
Marleen Evertsz, CEO and Co-founder of tokenized securities and digital asset trading platforms Nxchange and GoldRepublic
Cash = King until free money hits the economy
The governments and central banks have a tough job to respond. Printing money seems to be the motto worldwide. While many investors have liquidated their entire portfolio and are waiting on the side-lines for new opportunities, hundreds of billions are being put into the economy to mitigate the financial consequences of this crisis. The risk of inflation or even deflation being our next opponent significantly increases.
In (physical) gold we trust..
The interest to invest in tokenized securities in order to finance private equity or any form of an alternative investments seems to have vanished. Logically in these extreme times, we see a massive run to Gold. When owning physical gold or any (digital) real asset there are a few key matters to bear in mind.
Digital physical allocated gold a language contamination or a real asset
When owning physical gold, owning gold bullion is perhaps the best-known and most efficient form of physical gold ownership. Certified, investment grade standard gold bars with serial numbers as being held by our central banks. While investment grade gold bars are an impressive sight, their large size of up to 400 troy ounces (approximately 12.5 kg) makes the bars costly to buy, and therefore an illiquid asset to trade. After all, if you own one large gold bar worth over Eur 550k as your entire holding in gold, and then decide to sell 10%, you can't exactly saw off the end of the bar and sell it.
Securitizing or tokenizing (fractionizing) the ownership of a physically allocated bar and the possibility the ability to trade this bullion ownership in a decentralized environment seems to be a practical solution. Although a securitization process can be done increasingly efficiently at Nxchange, the costs still don’t offset the possibility to own or co-own the actual bar itself like we do at GoldRepublic. On top of that in crisis situations, most gold investors prefer to hold the actual metal itself legally in their name. The fact that all bars are unique identifiable by a serial number makes it very possible to fractionize the ownership in the bar itself (co-own a bar), transfer the ownership a longa manu and digitize the ownership registration.
Long arms to receive and safeguard your gold while trading it
In a a longa manu (long-hand) delivery, the legal ownership of an item is transferred that is under a third party at the time of delivery. An example is if A has his investment grade gold bar stored at F and in the meantime sells his bar to B. With a long-hand delivery, it is not necessary for A to first take his bar from F, then deliver it to B, after which B will return the bar to F, but A can deliver the bar to B via F. This requires a two-sided statement and a message to F. Instead of A, F now keeps the bar in front of B, so B can keep the bar at F. The property transfers as soon as A or B notifies the transfer to F and F acknowledges the transfer.
Which bar is yours?
Its simple. If you can't identify which bar you own when you received it (directly or a longa manu). You don't own it. If you don't know the bar serial number that is stamped into your bar, the likeliness that you actually own the gold as opposed to a claim on a holder (such as your bank) that stores the gold in its vault, is close to zero.
Who’s the twin?
Trading digital assets stored at F means that F has a significant role. F connects the physical asset to the digital world and functions as an independent depository (vault, bank, central securities depository) of the physical asset. The asset now has a digital twin that can actually be traded. In a digital (decentralised) world we call it a token. F at all time has to confirm that the token represents a (physical) asset that is actually stored at F. For obvious reasons F at all times should be independent and not related to A, B or the marketplace that allows A and B to trade the digital twins of the physical assets.
Chain of integrity
And even is F confirms that the actual physical asset is held at the depository, in the case of gold you need to know where it comes from. You need to be assured that no forgery has taken place and the gold you have bought and was delivered to you is certified and has professional investment grade status to be able to sell it when you need to.
Accredited precious metal refiners of the London Bullion Market Association produce Good Delivery bars. These Good Delivery bars are accurately assayed and guaranteed always 99.5% pure gold or better. The market trades their pure gold content (gross bar weight x purity) which is known as fine gold (no-one who trades professional market bullion ever pays for impurities).
To retain Good Delivery status, the Troy ounce bars of gold traded by refineries, central banks, wholesalers, bullion banks and professional dealers must remain inside secure, recognized gold bullion vaults.
Take these gold bars out of market-approved storage and they break the chain of integrity that guarantees each bar's gold to the next buyer. It's the integrity of Good Delivery gold bars that ensures maximum resale when you come to sell.
Atomic swap, Delivery versus payment
Once it can be guaranteed that the token represents an asset that is up to a certain quality standard, the counterasset in transferring or trading ownership is as important as the traded asset itself. This could be cash or any other asset the seller is wishing to accept in return for its asset. In a custodial model the marketplace guarantees that the buyer actually has cash (or tokens) and that the seller actually owns the asset. On top of that the marketplace should guarantee that buyer and seller can make an atomic swap in exchanging the ownership in the assets.
When both buyer and seller are the owner of the relevant cash or asset, an atomic swap (delivery versus payment) can take place to avoid any counterparty risk. When a trade is matched, tokens will move from seller to buyer wallet while the corresponding cash balance moves in the other direction. The buyer can withdraw the tokens from the custodial marketplace to a directly controlled wallet if he wants to, while the seller may withdraw the funds from his cash balance.
Your digital asset checklist
So summarizing, please keep your investments in real (digital) assets safe by making sure you can do the following:
1. Assure that the asset is actually delivered to you and you legally own the asset by receiving the asset directly or getting it delivered a longa manu.
2. Be able to identify your asset at any time you own it
3. Assure the quality of the asset
4. Have an independent custodian confirming that the digital twin or token that represents your asset is a real asset
5. Make sure when trading your assets you don't run any counterparty risk
Stay safe, stay healthy in these crazy times.
Marleen Evertsz
CEO en medeoprichtster Marleen Evertsz heeft een bewezen track record in het leiden van innovatieve FinTech bedrijven. Sinds 2010 loopt ze voorop in het digitaliseren en verhandelen van fysieke activa met GoldRepublic. Nu richt ze zich op het bouwen van volledig gereguleerde handelsplatformen voor de uitgifte en notering van tokenized securities en gedigitaliseerde activa op Nxchange en GoldRepublic in nauwe samenwerking met Europese toezichthouders, ABN Amro Clearing bank en de Rabobank.
Over GoldRepublic en Nxchange
Tokenized securities en gedigitaliseerde activa zijn ons ding bij GoldRepublic en Nxchange. Wij houden ons al meer dan 10 jaar bezig met het verhandelen van deze activa en maken het mogelijk dat institutionele en particuliere beleggers posities in deze activa innemen.
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