Gold has been seen as a safe haven asset in times of economic and geopolitical turmoil, and it is undeniable that this precious metal also needs to be ready for the digital age.
Digital Asset, a leading blockchain solutions provider, has announced the successful completion of a collaborative initiative to tokenize government bonds, Eurobonds and gold, with the participation of the World Gold Council (WGC). Other participants include Euroclear, global law firm Clifford Chance and many others such as investors, banks, central clearing partners (CCPs), custodians and securities depositories.
Accordingly, the purpose of the pilot program is to demonstrate how tokenized assets on the Blockchain can enhance the liquidity of collateral assets, improve liquidity and increase transaction efficiency.
In 2023, the average gold trading volume will reach $162 million worldwide and the same figure for 2024, showing that the growth and use of gold as a trading asset shows no signs of slowing down.
Meanwhile, Digital Asset said that government bonds and eurobonds provide a high-quality source of liquidity. As of mid-2023, the total government bond market in the UK amounted to nearly £2.4 trillion, with over €12.97 trillion of eurobonds outstanding.
During the pilot in June and July 2024, 27 market participants used the Canton Network. Canton Network is the first and only public chain in the financial industry that achieves privacy, control, and interoperability. Using Canton Network to connect 5 types of cross-application transactions using 11 distributed applications, including 6 registration applications and 5 escrow applications, with a total of 500 transactions completed.
Digital Asset said that the test successfully demonstrated the ability to create digital copies of previously real-world assets (RWAs) and use those tokenized assets as collateral in atomic, real-time transactions.
Mike Oswin, Head of Global Market Structure and Innovation at WGC, said: By digitizing gold, we can overcome the limitations of moving and storing physical metal, allowing this high-value asset to be mobilized and used seamlessly in financial markets. To achieve this, the tokenization process must be able to designate a standard gold unit (SGU) that represents and converts an agreed amount of pure gold into monetary value.
Oswin added that an attribute record could be created as a secondary token to hold details of the gold bars collateralized in the ecosystem. This would allow all physical gold with reliable integrity to be used as financial collateral, regardless of its physical properties and location.
According to Kelly Mathieson, Director of Business Development at Digital Asset, this pilot project is a significant step forward in the development and adoption of cryptoassets in collateral management, creating a more flexible operating model between different parties.
In addition, it has demonstrated that cryptoassets can be used instantly to meet intraday margin requirements outside of normal settlement cycles, processing times, and time zones. It also demonstrates how the ledger can act as a legal record and authenticate the secured party’s control over the digital copy and the real asset is recognised as escrow or collateral, in the event of a counterparty default.
Tokenisation through the creation of a digital copy is rapidly becoming the preferred method of placing real assets on the blockchain and is expected to be the common method of tokenising RWA in the future.
As for the legal implications of using a digital copy of a real asset, Paul Landless, Co-Head of Fintech at Clifford Chance, who observed the pilot, said: With certain approaches and platforms, the digital copy is not a separate asset and therefore the impact on agreements, transactions, processes and valuation methods is minimised, but it is important to ensure that the digital copy is met and reflected in existing product and platform data.
As a record-keeping and operational tool rather than an asset, some legal and regulatory issues can be avoided, avoiding the need to overhaul or re-establish all existing product and asset documentation.
This pilot follows several previous pilots of Canton Network, a platform for applications connecting global economic networks.
In September 2024, Digital Asset announced the completion of a pilot program, in collaboration with the Depository Trust & Clearing Corporation (DTCC), which is testing the US Treasury (UST) Collateral Network. This initiative focuses on leveraging distributed ledger technology (DLT) applications to support market connectivity throughout the collateral management lifecycle to enhance the mobility, liquidity, and transaction efficiency of cryptoassets.
In that pilot project, Digital Asset, 4 investors, 4 banks, 2 central counterparties, 3 custodians/collateral agents, and 1 central securities depository operated 14 Canton nodes, connecting 4 types of cross-application transactions through 10 distributed applications, leveraging DTCC’s LedgerScan solution to support asset tracking and management related to the pilot transactions. Participants successfully executed 100 transactions, demonstrating the functionality and robust potential of tokenized collateral.
Digital Asset said the UST Collateral Network pilot demonstrated the feasibility of more complex real-world transactions, including creating a digital replica of UST, using tokenized UST assets in real-time to meet margin calls, complete asset recovery, and demonstrate the secured party’s control of the assets in closing situations.
Most blockchain pilots focus on the initiation or completion of transactions, but in this pilot, that lifecycle has been extended to include default. This is important, as collateral is not just about mitigating risk – it also ensures that in the event of default, secured parties can legally hold the collateral. This demonstrates the potential of Blockchain to support the entire lifecycle of financial transactions.
According to Mathieson, the pilot shows that tokenized assets can be leveraged to optimize collateral. In addition to the liquidity and operational efficiencies gained, the pilot demonstrates that tokenizing collateral can improve market transparency, legal certainty of ownership in foreclosure/closure situations, and significant practical benefits, including faster mortgages and increased regulatory oversight.