While gold tokens are still small compared to the overall digital asset market, they are growing rapidly. According to data from CoinGecko, there were nearly 20 gold tokens with a combined market capitalization of almost $6 billion as of Monday, with offerings from Paxos and Tether accounting for more than half of the market. The total market has more than quadrupled since the end of 2024.
INVESTOR PROTECTION TEST
Spot gold prices rose to a new record high of $5,594.82 on Thursday, but a day later posted their biggest single-day drop since 1983.
Such outliers could threaten investor protections associated with such new products if a flood of redemption requests for the physical metal exposes gaps that industry experts say may exist. In the case of some tokens, it is unclear where the underlying metal is stored and who controls it, making investors less transparent than in traditional gold markets, they said, although some issuers refute that.
“It’s not clear what you actually own when you buy a digital token ‘backed’ by a physical asset,” said Adrian Ash, head of research at online marketplace BullionVault.
“If you had to assert your ownership in a legal dispute, the court could decide that you actually only own the token, and not the gold.”
Paxos said in a statement that it operates under federal supervision, with all reserves protected in case it goes bankrupt.
Each token is 100% backed by fully allocated institutional-grade physical gold held in vaults in London and can be redeemed for physical delivery at any time, it added.
Tether did not respond to a request for comment, but says on its website that Tether Gold gives you “ownership of real physical gold.” Tether had about 16.2 tons of physical gold in stock as a reserve for the token at the end of December, it said last month.
TOKENIZATION PUSH
Tokenization has taken off in several asset classes over the past year, including stocks and bonds. Digital asset companies say tokenization allows faster and sometimes instantaneous settlement, increasing liquidity and reducing transaction costs.
But because the United States lacks a clear regulatory framework for tokenized assets, investor rights and protections vary, critics say.
When it comes to gold tokens, the primary concern is whether the physical gold that backs them is held on a one-for-one basis, independently audited, and readily available for redemption.
The question of who ultimately owns the underlying metal has been at the heart of several legal disputes following past commodity bankruptcies, including when US hedge fund MF Global collapsed in 2011.
The added layer of tokenization will likely only make such disputes more complex, some investors said.
“The bulk of the risk lies off-chain, in whether the token represents a direct, bankruptcy claim on specific allocated bars or a contractual claim on an issuer and its custodians, and that vast distinction determines whether holders own an asset or own a promise,” said Michael Ashley Schulman, partner and CIO at Running Point Capital Advisors.
The supervision of such digital assets is also evolving.
Campbell Harvey, a professor of finance at Duke University, noted that a long-awaited bill passing through Congress has put the Commodity Futures Trading Commission in charge of such products. Although it is unclear whether this controversial legislation will ultimately be passed, Reuters reports.
Any time you have a freedom arrangement like this, it’s a challenge, Harvey said.
CRYPTOS ‘GOLD RATE’
While investors have also traditionally used gold as an inflation hedge, interest in tokenized gold was fueled by the metal’s rally as geopolitical tensions fueled demand for safe havens.
“The explosive growth in popularity of gold-backed tokens reflects a newer, younger demographic that is becoming interested in gold, perhaps frustrated by the lack of momentum in bitcoin prices,” said independent analyst Ross Norman.
While gold was on the rise, Bitcoin, the world’s largest cryptocurrency, which is also seen as an inflation hedge, fell about 38% from its October high.
Paxos said it saw record inflows into its gold token in January, growing its market value by the equivalent of around 1.68 tonnes of gold and taking London’s total physical gold supply to more than 13 tonnes.
Proponents of tokenized gold say it could replace bitcoin as the preferred inflation hedge in crypto portfolios.
“We will have about 10% in bitcoin and 10% to 15% in gold,” Tether CEO Paolo Ardoino said in an interview with Reuters last month, discussing the company’s investment portfolio.
“It’s hard to decide which one I like best,” he said.
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