Why create a gold backed token when there’s already GLD?
Update: The gold backed token has officially been named GOLDX!
Recently a supporter shared with us a comment thread on the EthTrader subreddit that talked about HelloGold. One of the responses was:
I don’t see any advantage of this product over GLD if we have to trust that there is real gold behind it. Seems in both cases we are reliant on regulators to hold the management company accountable. Will this be a registered security with the SEC? Will holdings be within the USA? Which regulatory agency will be auditing the private chain?
The primary value of a block chain is the trustless exchange of value. This product doesn’t even seem to attempt to achieve that goal.
It was a great list of questions on HelloGold’s gold backed token. Sadly, the 2,000-word answer (from Robin, who knows a thing or two about GLD) wasn’t the best fit for Reddit’s formatting.
To make for better reading, we’re rewriting it on Medium with links to two related posts we’ve shared previously:
Full answer as follows:
The gold backed token is designed for 2 audiences. In the short term it aims to give the crypto investor a fast and convenient route to hedge their portfolio with gold, i.e. bypassing the need to convert to fiat, register with a broker and buy GLD — and back. This is very useful in the context of high transactional friction and significant market swings.
In the longer term, it will give a convenient low-cost entry point for retail customers to buy gold safely, from the point of view of the billions of people around the world who can’t afford or don’t have access to the securities market.
Trust is a key factor to make this work. Using blockchain technology means that anyone can be confident that the token they hold is valid and unique. However token holders also need to be reassured that the gold is real and can be redeemed at some point. We went to great lengths to do this. And, to make it truly accessible for all and therefore truly inclusive, we even enable customers to redeem the physical bar from as little as 1g — in contrast, GLD is not redeemable.
This is not to say that the GLD is not a great product. It’s actually an amazing product (Note: I was principal accounting officer of GLD and the CFO of its sponsor, the World Gold Council). So what am I trying to say? Let’s break it into parts and go over each point.
GLD is a great product
One of the most innovative products that emerged in the last 15 years was the gold ETF in 2003 — physical gold in the form of an exchange traded security. Prior to the launch of these ETFs, there was huge scepticism that there was demand for such a product — enabling the retail investor to buy 1/10oz or 1/100oz at spot. Many argued that investors only wanted the physical gold and would never want gold-backed securities. They were wrong beyond anyone’s wildest imagination — at one point during 2011, the World Gold Council’s SPDR Gold ETF (GLD) had more under management than its equivalent US stock market product, SPY. Fast forward, nearly 15 years later, the physical gold ETF universe has over US$90b[1] of gold under management and make up a third of investment demand for gold. Physically-backed gold ETFs as a group are now the fifth-largest holder of gold, falling just behind the U.S., Germany, Italy and France. The introduction of the ETF gave people access to the gold spot market in equity form for the first time. Suddenly, gold could be traded just as easily as buying shares of any stock. Before the ETF, investors could not easily invest in gold. They could buy coins or bars, but due to issues like storage and acquisition, investing in gold was not at all liquid, transparent or efficient.
Taking GLD as an example, the largest gold fund in the world is run by the World Gold Council. The fund is SEC-regulated, its trustee is Bank of New York, its SOX auditor is Ernst & Young, its auditor is KPMG, the bullion auditor is Bureau Veritas, and the bullion is vaulted by HSBC. The World Gold Council is accountable to the SEC for the management of the fund. But it also has all these other relationships to ensure that the fund is properly managed. Trust is not placed wholly on the regulator but also on the other parties performing their roles at all times. Trust fundamentally to assure the investors in GLD that the gold that they have acquired really does exist. In spite of all the multiple locks that arise from having so many independent parties overseeing GLD, there are still a core group of investors that believe that the gold does not exist — that if every investor were to liquidate their GLD stocks, the fund would not be able to honour the sale. As the former CFO of the fund, I have met professional fund managers who have expressed these concerns regardless of the safeguards and controls that I have shared with them — eg that a Bureau Veritas team practically resides in the Canary Wharf vault checking the gold for the better part of every year; that both E&Y and KPMG send their own audit teams to review the processes etc.
Notwithstanding the marginal investor who does not trust GLD or gold-backed ETFs (there is a sizeable group out there!), these ETFs have been incredibly successful, so is there a meaningful role for a gold-backed token? At least from my viewpoint, the answer is undoubtedly yes for the following reasons:
The gold backed token will be a useful tool for the crypto investor
Crypto investors can experience significant friction when converting their holdings into something else, from cryptokitties clogging the network to banks shutting down accounts. Having the ability to manage better their portfolio by converting crypto straight into a real asset like gold will be a huge relief to many investors, particularly when they want to get out of / get into the market quickly and “ride” extreme volatility.
The man in the street needs a gold backed token
This is the ultimate purpose of the gold backed token. But it requires a more lengthy explanation. Let me elaborate:
1. Many people do not buy securities
In the US, arguably the most developed financial market in the world, less than 50%[2] of Americans do not invest directly or indirectly in securities. Assuming that participation levels in emerging markets are, at best, no better than the US, there remains a large portion of the population that do not have the ability to invest in gold through an ETF. Everyone will be able to buy a gold-backed token with simply a crypto-wallet and a computer or mobile phone.
2. Transaction sizes remain beyond the reach of too many
In the same US survey, more than half of those who do not invest through the stock markets said it is because they do not have enough money to do so. With a gold-backed token, investors will only need US$1 to buy gold. Everyone can save.
3. Gold ETFs are not available in all markets
Without the benefit of a broker with access to international markets or sufficient capital to apply for an account with an international online broker, many are unable to access the right exchanges to buy a gold ETF. With a gold-backed token, the man in the street needs only to have a mobile phone with a crypto-wallet.
4. Gold as collateral
For the high net worth and wealth management market, it is possible to use their investment portfolio to secure financing. To the man in the street, this avenue is typically not available to them. In the emerging markets, the problem is more acute where financing from traditional financial players form 20% of all loans made and where 2/3rd of loan applicants are typically turned away from mainstream financial lenders. HelloGold’s gold-backed token aims to enable its holders to access affordable financing.
If ETFs brought gold to the mainstream securities investor, digitising gold into gold-backed tokens has the potential to democratise gold for the man in the street. Gold-backed tokens can remove the final barrier to wealth preservation for everyone — people’s ability to save through something other than cash will be simply a function of their desire to save through gold and no longer because they do not have access to the right product because they live in the wrong country or because they do not have enough funds to save.
Trust
And finally, the question of trust. I don’t believe that there is a way of making the gold-backed token trustless. Trustless-ness is possible in the blockchain because it gets its power from its decentralisation. With gold (and I believe, with any other real assets), trust has to play a key role because it is centralised and can never be decentralised (eg the gold has to be stored somewhere. Unless it is physically in your hands, you have no choice but to trust someone ie a vaulting provider). At HelloGold, we have done and we will continue to do our utmost to provide as many ways as possible for our customers to verify our claims — from showing the daily bar listing on both our website and our bullion provider’s site, to providing information on auditors and insurance providers. We have done as much as we can think of to prove the existence of the gold but we cannot physically “put it on the blockchain”.
Allow me to illustrate how much trust is required for the purchase of gold.
When anyone buys physical gold, they are at risk of buying something that isn’t gold. For as long as gold has existed, there have always been those who have tried to make it themselves through counterfeiting. So typically buyers are advised to buy their bullion from reputable dealers. But even then, the buyer has to trust that the dealer is procuring their gold directly from a reputable refiner and is checking the bullion for their weight, metal, and authenticity. There are, of course, ways that the buyer can reduce the reliance on the dealer’s reputation — he can have the gold assayed independently. But he is still effectively trusting the assayer to be doing his job properly. And then the buyer may want to store the gold in a vault. The vaulting agent could potentially lend the gold without the buyer’s knowledge and have it returned before the next independent audit. There is no easy way of knowing whether this happens or not. Some retail vaults have installed cameras to give their customers a 24/7 view of their gold. That may be a solution when you have $5m of London good delivery bars. But what happens when you have hundreds of millions (if not billions) and there is constant movement in and out of the vault? Again, trust comes into the equation.
Maybe one day someone will figure out a way of creating a trustless gold backed token. But for now, we in HelloGold believe that trust remains key to ensure the success of real asset-backed tokens. And so we have factored into our business a number of attributes to build trust:
1. The reputation of our investor base
The FinLab accelerator, a JV between United Overseas Bank and SGInnovate, is one of our investors. And SGInnovate (SGI) is wholly owned by the Singapore government. 500 Startups and Fenbushi Capital are also our investors. As we build our market presence, we are confident that other government bodies and VCs will invest in our business
2. Singapore as a safe haven
The gold is held in Singapore, one of the world’s leading financial centres. For those familiar with the history of gold, you will know that the US government in 1933 made gold ownership illegal and required everyone to turn over their gold to the Federal Reserve in exchange for paper money. While I don’t believe that the US government is likely to go down this path again, there are many who fear that it might.
3. Transparency
We provide significant transparency in the amount of gold 1) we hold on behalf of our customers and 2) have in the vaults. And we also provide links to our vaulting agent to enable our customers to cross-check with their website. All this is updated on a daily basis.
4. Independent service providers
We use an independent vaulting agent who also insures the gold and engages Bureau Veritas for a semi-annual audit. Our independent auditors are Deloitte and Moore Stephens. We are looking at how we can create a ‘trustee’ relationship that will give customers assurance while enabling our customers to buy and sell gold instantly.
5. Accessibility of the blockchain
Even though we are not regulated, we have built our operating model and processes on the basis that we are regulated. In this vein, we intend to make our private blockchain available to regulators and, subject to data privacy rules, to enable our mobile and finance partners to be nodes.
Sources:
[1] World Gold Council, ETF data 2017
[2] http://www.bankrate.com/investing/did-you-miss-the-stock-market-rally-youre-not-alone/
