Digital Gold, USA News (Lansing, Michigan): On October 21, the World Gold Council issued a report titled Digital Gold: Unlocking A $700-Billion Opportunity. While gold has a multi-thousand-year history as money and a store of wealth that has never failed, owning the physical metal has multiple drawbacks, such as the need for physical delivery to trade it and the necessity that buyers and sellers be physically present to ship or receive it. Some of these drawbacks could be overcome if it were possible to trade gold digitally, but the concept of digital gold itself faces multiple barriers.
For purposes of this report, digital gold includes two kinds of products: a digital token that gives investors ownership of a specific quantity of physical gold in secure storage, or an app- or platform-based account of physical gold held in secure storage by a third party. Physically backed gold exchange-traded funds, leveraged products, and gold-backed stablecoins are excluded from this analysis.
Barriers to Digital Gold Trading
The most important obstacle is whether the provider of digital gold could be trusted. This includes providing a clear and accessible means to redeem digital gold for physical gold. The second major barrier is whether digital gold could be traded through familiar channels such as super-apps, payment platforms, and banking apps, as is now possible in India, China, and Indonesia, where trading volume is seven times more active than where these channels are not yet available.
Third, digital gold needs to have utility. Questions remain regarding whether it could be used to make payments, utilized as collateral when seeking a loan or mortgage, or leased to earn a return. Last, the cost of digital gold transactions would need to be low or lower than the cost of other gold alternatives, including physical gold or owning shares of gold exchange-traded funds.
In surveys conducted to compile the report, the World Gold Council learned that any failure of a supposedly secure gold storage facility or any hacks into the digital trading system would represent a significant obstacle to confidence in trading or holding digital gold. The report does not provide nuts-and-bolts solutions to these barriers.
Physical Storage and Government Programs
Physical gold and silver have an advantage over paper or digital forms because they are their own assets, where value does not depend on another party’s reliability. Governments throughout history have debased their coinage, defaulted on promises that fiat currencies could be redeemed, or made ownership illegal. Multiple government mints have gold certificate storage programs, including the Perth Mint in Australia, the Royal Mint in England, and the Royal Canadian Mint.
In these programs, investors purchase ounces of precious metal that are a claim against a portion of larger bars stored in mint vaults. However, questions persist regarding whether governments could change policies in the future to seize customer metals, or whether surges in demand could cause delivery backlogs, such as the six-month delay experienced by the Perth Mint in late 2008.
Tax Reporting, Utility, and Future Outlook
As for using digital gold to make payments, it faces the same obstacle as cryptocurrencies: every transfer constitutes a sale reportable in US dollars for a capital gain or loss on American tax returns, impairing its payment utility. Creditors offering loans against digital gold might also lack protection without mechanisms preventing liquidation without consent, while leasing digital gold introduces risks regarding physical security and repayment.
If digital gold trading achieves high projected volumes, costs could decrease to compete with alternatives. Furthermore, while expanded digital options could displace some demand for physical metals and ETFs, World Gold Council surveys found that over 40 percent of digital gold purchasers had never previously invested in gold, suggesting that digital options could expand overall market participation and raise demand.
