According to the Financial Times, the World Gold Council (WGC) is planning to launch gold in digital form. This initiative could create revolutionary changes in the trading, settlement, and collateralization of gold, potentially transforming the $900 billion physical gold market in London.

The World Gold Council is an industry organization representing the interests of gold miners. Its CEO, David Tait, stated in an interview with the Financial Times that this new form will allow for the first time the “digital circulation of gold within the gold ecosystem, using it as collateral.”

While many investors value gold for its physical characteristics and lack of counterparty risk (viewing it as a safe-haven asset), Tait believes that the digitalization of gold is necessary to expand its market reach.

Tait, who previously worked in the banking sector, stated: “We are working to standardize the digital aspect of gold so that the future gold market can also utilize various financial products commonly found in other markets.” He added: “My goal is to change the perception of gold among numerous global wealth management institutions.”

This week, gold prices reached an all-time high, and its value has doubled over the last three years. However, despite the significant increase, gold remains a low-liquidity and non-yielding asset on the balance sheets of most banks and other investors. Tait believes that if gold were digitized, it could be used to meet margin requirements and serve as collateral, thereby generating returns.

Tait stated: “From a collateral perspective, banks can earn substantial profits because they have the opportunity to use the gold on their balance sheets as collateral.”

The new digital sector, called “Parted Gold Interests (PGI),” will allow banks and investors to buy and sell partial ownership of physical gold held in independent accounts. London trading institutions will participate in a pilot project of this model in the first quarter of next year.

A white paper published Wednesday by the World Gold Council and Linklaters shows that the framework is based on a small number of core participants who collectively hold the underlying gold through a trust structure. This is the latest initiative by the World Gold Council to promote the digitalization of the gold market, following the launch of a blockchain database for refineries and gold bars in January of this year.

Despite the surge in gold prices, some insiders believe that, as one of the world’s oldest assets, gold runs the risk of being overtaken by competitors such as cryptocurrencies and stablecoins pegged to traditional assets.

By launching a new type of digital gold, the World Gold Council aims to achieve goals that others have been unable to reach.

To date, most attempts to create gold-backed stablecoins have ended in failure. The two most successful gold stablecoins, Tether Gold and Pax Gold, manage approximately $1.3 billion and $1 billion respectively, which is only a small fraction of the $400 billion managed by gold ETFs (Exchange-Traded Funds).

The London gold market is the largest physical gold trading center in the world, supported by substantial holdings from commercial banks such as HSBC and JPMorgan, as well as Bank of England reserves, with transactions conducted in an over-the-counter (OTC) format, meaning that trading parties reach agreements directly without the need for a central clearinghouse.

The white paper highlights that trading in the London gold market is divided into two categories: “allocated gold” trading (involving specific gold bars) and “unallocated gold” trading (which establishes only the quantity of gold without specifying particular bars). The World Gold Council’s proposal would introduce a third type for over-the-counter gold trading in London.

Allan Guild, founder of Hilltop Walk consulting, which provides advisory services for the project, stated that the pilot project will involve “major banks and trading firms” as co-owners of the underlying gold.

However, some market participants say this move could meet resistance, as the gold market is dominated by established institutions that are risk-averse.

Adrian Ash, research director at the gold trading platform BullionVault, wonders if the London gold market will adopt this model. He stated:

“Gold is already the best-performing asset class. It seems like a solution in search of a problem.”

In January of this year, the London Bullion Market Association (LBMA), which represents gold trading banks, jointly launched a blockchain database called the “Gold Bar Integrity programme” with the World Gold Council; however, the implementation of this database has been slow.

Nevertheless, Ruth Crowell, CEO of the London Bullion Market Association, stated that “the rollout is proceeding very smoothly” among refineries. Ninety-six percent of the refineries on the LBMA’s “Good Delivery List” have joined the program.

Tait indicated that the purpose of the database is to improve refinery transparency, verify the source of the gold, and phase out “bad practices.” He noted: “The process can sometimes be challenging. But I remain confident that one day it will change the way gold is purchased.”

Tait added: “As the database becomes more widespread, everyone will use it… Every gold bar will eventually have its own ‘passport,’ its own ‘birth certificate’.”