White Paper: Pooled Gold Interests and Wholesale Digital Gold A New Vision for the Gold Market

There is an ‘opportunity gap’ in the gold market. For many years, the over-the-counter (“OTC”) gold market has been settled through two key structures – allocated gold and unallocated gold.

Allocated gold refers to physical gold bars stored in vaults which are specifically allocated to a holder, where each bar has a unique serial number, weight and fineness.

Settling through allocated gold allows for the transfer of direct ownership and title to specific gold bars, which has traditionally provided holders with the certainty of gold ownership while insulating holders from the credit risk of the custodian banks. The ‘quid pro quo’ for this certainty is increased operational complexity and a limitation of holding only whole-bar multiples.

Conversely, unallocated gold refers to a holder’s credit claim against an institution where their unallocated account is held, for a specific quantity of gold.

In the unallocated gold market, specific gold bars are not set aside for the holder, rather the holder has a contractual right against the institution where their unallocated account is held in respect of their entitlement. Unallocated gold has traditionally provided holders with greater liquidity through deeper markets, and quick and simple settlement mechanics. However, the ‘quid pro quo’ for unallocated gold is that it requires holders to take the credit risk against the institution where their unallocated account is held.

We believe there is a unique opportunity to reshape the current landscape by establishing a third foundational pillar for settlement of gold in the OTC market: the Wholesale Digital Gold ecosystem (the “Ecosystem”). The creation of this new Ecosystem will be underpinned by the development of an innovative new digital form of gold, Pooled Gold Interests (“PGI”) in respect of Gold Bars. This third foundational pillar to the gold market has been designed to sit alongside existing settlement through allocated and unallocated gold, and is founded on the belief that gold, when paired with a new legal infrastructure, could unlock significant new opportunities for trading, investment and collateral posting across financial markets.

As a third foundational pillar of the gold market, the Ecosystem and PGI will capitalise on the benefits of both allocated and unallocated gold, while minimising their respective drawbacks. In other words, they will address the ‘opportunity gap’ between the first two pillars, by evolving gold as a financial asset, making it easier to transfer, enabling fractional ownership of gold bars, ensuring protection from the insolvency of the custodian, and allowing for more flexible use of gold as collateral.

This whitepaper explores the details of this ‘opportunity gap’ and presents the Ecosystem and PGI as a unique and timely solution. It has been written as part of an industry initiative sponsored by the World Gold Council, in close collaboration with Hilltop Walk Consulting and Linklaters LLP and draws on insights from leading market participants involved in the initiative.

The principles and framework set out in this whitepaper are adaptable and could also be used for other commodities. By more broadly adopting the principles set out in this whitepaper, the financial markets could benefit from enhanced efficiency and capabilities across a range of physical assets, which could transform how commodities are held, traded, and utilised in the broader financial system. 

We believe that the principles and framework set out in this whitepaper are also highly aligned to the UK Government’s Wholesale Financial Markets Digital Strategy.¹

Footnotes

¹HM Treasury, Policy Paper: Wholesale Financial Markets Digital Strategy, https://www.gov.uk/government/publications/wholesale-financial-markets-digital-strategy/wholesale-financial-markets-digital-strategy.