How Blockchain is Changing Gold Markets
by Peter Shadbolt. Source: CME Group
The Royal Mint and CME Group team up to create a new digital gold product
The RMG blockchain and trading platform are in live testing with major financial institutions
An open source blockchain aims to give more transparency to gold settlement
One of the great promises of blockchain technology is that it could transform the way we conduct transactions. From banking to smart contracts to recording land titles, the promise of blockchain technology to make a whole range of functions more efficient is being tested in proofs of concept at a rapid pace. And, in the financial services space, the latest example of a blockchain technology offering efficiencies is RMG (Royal Mint Gold), a digital gold product created by The Royal Mint and CME Group.
CME Group is responsible for developing and operating the product’s digital platform which will provide a fast, cost-effective and cryptographically secure method of buying, holding and trading spot gold.
Backed by Real Gold
Sandra Ro, head of digitization at CME Group, says the new blockchain-based product is an entire trading eco-system for gold, providing speed, security as well as transparency of direct ownership.
“An RMG is a digital representation of real gold sitting in the Royal Mint vaults,” Ro says.
“When you purchase RMGs you will effectively have real gold that is allocated from a direct ownership standpoint that is completely reserved – there is no re-hypothecation, there is no lending on that gold, there will be enough physical gold to represent all the RMGs that are issued.”
Currently the plan is to launch the product backed by up to $US1 billion in gold bullion.
As well as being able to trade RMGs through digital wallets, investors and traders will also be able to take delivery of physical gold if they so wish.
“This is the first digital gold product that is institutionally targeted – and the first to work with a government entity – to be currently in a live testing state,” says Ro.
“Distributed ledger technology is a game changer and supplying gold on a blockchain has been something The Royal Mint has wanted to develop for some time,” says Vin Wijeratne, CFO of The Royal Mint.
“Developing a trading platform with CME Group will satisfy customer demands for faster, cost effective and secure ways to buy, hold and sell gold and complement our existing products. This landmark partnership allows us to combine the world’s leading mint, the best commodities futures trading platform globally and best in class technology.”
An Open Source Blockchain
Ro adds that one of the key aspects of making this distributed ledger technology as effective as possible is to release it as open source code ahead of its launch. Blockchain security company BitGo has been working with CME Group to develop the architecture, rules and parameters of the blockchain. Developers, businesses and researchers can now access, evaluate and test the code.
“We are open sourcing elements of it but we don’t want to give the illusion that this is an open network. It’s not initially,” Ro says.
“It’s a permissioned private network, and we’re going to be allowing for some of the source code – which is based on Bitcoin anyway and which is already open source – to be enhanced and modified.”
She says that this would work towards obviating some of the challenges that had been part of the user experience with other digital asset platforms.
“A brilliant view into transactions”
Igor Telyatnikov, President & COO of AlphaPoint, the blockchain technology company CME Group has partnered with to provide the RMG trading platform, says that it had been working alongside BitGo, the developer of the blockchain code, to develop the secure platform.
“This trading platform will provide a high performance and secure venue to buy and sell RMGs. We are excited by the response so far and welcome new financial institutions to engage for an early look, says Telyatnikov.
The CME platform will be the first institutional trading platform for digital gold.
The CME electronic platform, powered by AlphaPoint, is currently in live testing with institutional traders.
“There is a higher level of traceability and audit that comes with blockchain technology because participants are provided with a permanent immutable record of ownership and chain of ownership and custody,” Telyatnikov says.
“It provides a brilliant view into transactions, which often is obfuscated and opaque in traditional markets.”
How RMG Works
Mike Belshe, CEO of BitGo, ,says the multi-signature Bitcoin wallet that his company pioneered would be at the core of the security technology for RMG.
All crypto-based digital assets, RMG included, are based on public key infrastructure, which allows a host of users on the network to authorize and verify transactions. Multi-signature, Belshe explains, takes this form of authorization one step further with an additional private key being held by a trusted party such as a bank or a lawyer.
“When you want to make a transaction, you sign with your own key and then you hand it to the other guy on a completely different system and get them to sign it too.
“This has turned out to be quite effective and is generally regarded by security experts as being the safest way to deal with digital assets.”
Ro says early response to RMG and the technology has been positive from a broad cross-section of market makers who are now testing the system.
“For us to have that diversity of client base is going to be important,” she says. “What we need are people who are not only going to buy and hold RMGs from a long-term perspective, but we also need people who are going to help the secondary market grow.”