HSBC takes stab at using blockchain to modernize London’s antiquated gold market

HSBC Holdings Plc has launched a platform that uses distributed ledger technology to tokenize ownership of physical gold held in its London vault, Mark Williamson, global head of FX and commodities partnerships and propositions, said in an interview. The new system creates digital tokens that represent gold bars, which can then be traded through the bank’s single-dealer platform.

HSBC isn’t the first to attempt using blockchain to simplify gold investing. Crypto startup Paxos in 2016 teamed up with Euroclear to build a blockchain-based settlement service for trades on the London bullion market. But the firms dissolved the partnership the following year. Paxos still offers a digital token backed by phyisical gold, called Pax Gold, which has a total market value of $479 million, according to CoinGecko.

What sets HSBC apart is its clout in the bullion market. It is one of the world’s largest custodians of precious metals and one of four clearers on the London gold market, where over $30 billion of the metal changes hands every day.

Around 698,000 gold bars are stored in vaults in the Greater London area, valued at around $525 billion, according to the London Bullion Market Association. Despite its vast size, London’s gold market still relies heavily on manual record keeping and trades entirely over-the-counter.

Using blockchain technology makes the process “quicker and less cumbersome” as clients can more easily track the gold they own through the platform, down to the serial number of each bar, Williamson said. HSBC plans to eventually expand its system to include other precious metals, he added.

One token on HSBC’s new system is equivalent to 0.001 troy ounce, compared with 400 troy ounces for a London gold bar, the bank said in a statement. The system could in the future be used to allow direct investment in physical gold by retail investors, if local regulations where they are based permit, it said. The initial focus will be on institutional investors, Williamson said.

HSBC’s gold system is part of a wider drive by the bank to use blockchain technology, which includes an existing platform for issuing and storing assets like digital bonds called HSBC Orion.

Over the past year, other several large financial institutions including JPMorgan Chase & Co., Euroclear and Goldman Sachs Group Inc. have commercialized blockchain-based applications, marking an acceleration of sorts for deployment of distributed ledgers in mainstream finance. It remains to be seen whether these new platforms and applications will be adopted at scale by market participants, as well as whether they deliver the benefits proponents have long touted.