Euroclear and Paxos Launch Blockchain For Gold Settlement in London

Financial technology company Paxos has teamed up with Euroclear to work on a blockchain for gold settlement in the London Bullion Market, called Euroclear Bankchain.

The announcement was made during a signing ceremony event at the SIBOS Annual Conference in Geneva, Switzerland, where Paxos and Euroclear officials and market participants celebrated their collaboration announced earlier this year.

Paxos CEO Charles Cascarilla said: “We are coming to market with a ground-breaking offering that will dramatically impact the post-trade process and overall trading infrastructure within the global gold market.”

So what is Blockchain?

Blockchain records data in what amounts to a digital ledger of transactions that need to be independently recorded and verified as having occurred. This ledger is distributed potentially up to thousands of nodes (e.g. computers) around the world with every participant seeing an up-to-date version of the ledger. This distributed approach is seen as a mechanism to reduce the risk of hacking as they would need to simultaneously hack all nodes that have access to this ledger.

So how does it work?

Digital records within the ledger are joined together into blocks then bound together securely and in sequence to form “chains”. This process is known as “hashing”. Once a ledger is updated it cannot be altered as only further additions can be made.  This hashing process offers the further advantage that the data is secure because it cannot be converted back into the original data.

So how does blockchain apply in the context of gold trade settlement?

Paxos and Euroclear feel that they are able to provide solutions to the issues associated with unallocated traded gold. They will lower costs, make delivery and payment systems more efficient, and reduce balance sheet issues utilising blockchain technology.

Gold is currently traded in two ways, allocated and unallocated. When you are sold unallocated gold you effectively become a creditor because the bank owes you the quantity of gold which you do not actually own. By putting your gold securely in a bank you legally become a depositor of gold. In other words you don’t own a specific bar of gold but a percentage of all the gold contained with a pool. Currently the vast majority of gold owned is unallocated.

With allocated gold you are the outright owner and not a creditor. It is therefore your property and can’t be used as part of a pool allocation and therefore offers you additional protection. Unlike unallocated gold which charge no storage fees, allocated gold is subject to fees of about 1.5 to 2% per year.

Interestingly, Euroclear wishes to act as a custodian in all the gold warehouses to ensure that all settlements are made in actual gold bars. This would mean that clients can trade unallocated gold without becoming the creditor and at the end of each day their trades are converted into actual gold bars or via split ownership of a bar, should their holding not equal a whole one. This would therefore ensure that the unallocated market has all the benefits of an allocated market.

Furthermore, there are many who believe that there is insufficient gold in banks to meet unallocated demand because clients are indeed creditors. Utilising blockchain technology will make significant improvements to the current market as they can ensure that the gold and payment transactions are made on the same day and simultaneously. Currently in London, unallocated claims are settled at the end of each trading day but there are settlement gaps with New York banks which can potentially cause currency or counter party risk. This simultaneous payment and delivery process reduces the overnight counter party risk that we currently see, whereby settlement is currently achieved in two days. It would now be possible to settle the same day or even instantaneously.

Arguably, this is the first real example of where we will see blockchain technology utilised in the financial services sector for real time transaction processing. We will follow this development closely going forward as no doubt many others inside the financial sector will do.

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