Tokenization of Gold: A Financial Revolution Driven by Regulation

New York bank runs, delayed deliveries, Basel's "tightening grip" ------ the hidden battle over the London gold vault's ledger.

Written by: Thejaswini M A

Compiled by: Saoirse, Foresight News

In February 2025, the market anticipated the U.S. would soon introduce tariff policies, prompting traders to withdraw gold from the Bank of England's vault to transport to New York. The wait time for gold bar withdrawals extended from a few days to 4 to 8 weeks, with all appointment slots fully booked.

Dave Ramsden, Deputy Governor for Markets at the Bank of England, told reporters that the process of entering the building that morning was particularly cumbersome due to a freight truck parked in the gold and silver vault area.

The London gold market typically trades ownership certificates for gold, while physical gold is securely stored in the vaults. However, during that uncertain period, the extractability of gold directly affected its price: gold under the Bank of England saw prices drop due to weeks of withdrawal queues; meanwhile, gold in commercial vaults saw prices rise, with buyers willing to pay a premium for immediate extraction and transport of physical gold.

On a regular trading day in May, banks responsible for London gold clearing saw trading volumes reach $73.7 billion, all without moving physical gold. By the end of July, London vaults held 9,534 tons of gold, valued at $1.2 trillion, equivalent to approximately 762,000 gold bars. Clearing institutions stated that this mechanism operates as such ------ transporting physical gold is costly and comes with security risks.

This article will explore why the Financial Conduct Authority (FCA) of the UK is beginning to establish regulatory rules for tokenized gold, and why the relevant regulations focus entirely on the ledger system.

London is the global center for gold trading. The London Bullion Market Association (LBMA) is the industry trade organization responsible for setting industry standards. The final clearing of debts between trading parties is completed by four clearing banks: HSBC, ICBC Standard Bank, JPMorgan Chase, and UBS Group. The electronic matching clearing institution operated by these banks is the London Precious Metals Clearing Limited (LPMCL), also known as AURUM.

The FCA has been in discussions with major banks about how to regulate tokenized gold and whether such assets can be used as collateral in the wholesale market. Prior to this, the FCA, the Bank of England, and the Prudential Regulation Authority jointly released a report on May 18, 2026, suggesting that tokenized gold could serve as collateral for non-cleared over-the-counter derivatives, with precedents already established in related fields.

In April, the FCA issued a policy statement confirming that all types of money market funds (including tokenized funds) are eligible to serve as collateral for non-cleared transactions under the UK version of the European Market Infrastructure Regulation (UK EMIR).

Currently, there are 16 institutions conducting tokenization-related pilot projects within the regulatory sandbox in the UK. The UK government estimates that by 2035, tokenization technology could add £33 billion to the UK economy annually. The first tokenized government bond is expected to be launched in early 2027, coinciding with the Bank of England's upgrade of its collateral system; by 2028, various digital ledgers are expected to achieve interoperability with the digital pound.

There is a common view that London's push for gold tokenization is driven by concerns over business loss to Asian markets. However, the fact is that this technology was developed in-house by London-based clearing banks. At the end of 2023, HSBC split standard 400-ounce gold bars in the London vault into smaller digital shares to facilitate trading for institutional investors. Subsequently, the bank launched a version for retail customers in Hong Kong, with a cumulative trading volume of $2.2 billion, but this innovation originated in London.

The London gold market performs four core functions: the first two are physical storage (vault and security) and quality verification. Quality verification confirms the compliance of gold purity, so buyers do not need to melt and retest the gold.

Tokens clearly cannot perform these two functions and must rely on physical infrastructure to conduct business. The third function is registering ownership of gold. Tokens excel in this area, being cost-effective, a consensus has already formed on this point.

The fourth function is credit business, which is also the key contradiction. Gold tokenization could render the existing credit system of banks obsolete. With tokens, ownership of physical gold can be transferred instantly, allowing investors to avoid having to entrust their gold to banks in exchange for convenient trading channels.

The vast majority of gold in the London market is held and traded in an unallocated account model. Customers do not own specific gold bars but have a general entitlement to a corresponding amount of gold. The LBMA likens this model to bank deposits denominated in ounces. Customers are unsecured creditors of clearing members. The gold in the vaults is aggregated onto the banks' balance sheets, maintaining the operation of the entire trading system. Once a transaction is completed, banks can immediately record it in accounts, leaving several days to process physical delivery in the background.

Buyers have two options: the first is to claim specific physical gold bars, which requires paying storage fees and involves a slow asset transfer process; the second is to hold unallocated gold, which is essentially a promissory note issued by the bank. Investors bear the credit risk of the bank, but transactions can be completed instantly. The vast majority of market participants choose the second option. In February, the average single transaction size in the market was equivalent to about 5 gold bars, relying on this mechanism, gold never had to leave the vault.

What would happen if the token model were adopted? Tokens would combine the transaction speed of promissory notes with the ownership verification power of corresponding physical gold bars. When both advantages are present, investors have no reason to bear the credit risk of banks. The London market is already highly electronic, so merely upgrading settlement technology is not the biggest change.

The FCA prioritizes focusing on collateral scenarios rather than trading scenarios because collateral business highly depends on speed. The notice for additional margin is given a very short time frame for institutions, and the traditional gold settlement system's flow speed is too slow, preventing the $1.2 trillion worth of gold from being used as collateral, forcing institutions to use cash or UK government bonds as collateral instead. Regulators understand that putting gold information on-chain can solve this pain point: ownership can be split and transferred instantly and accurately, allowing all gold in the vaults to be used as high-quality collateral.

The securities industry has already implemented similar solutions. HQLAX services support leading institutions such as BNP Paribas, Clearstream, and JPMorgan Chase in trading collateral ownership without moving the underlying physical assets. The U.S. Securities and Exchange Commission even allowed U.S. brokerages to access this service in May 2026, with a pilot period of 36 months.

This transformation was set in motion long before the rise of cryptocurrencies, rooted in stringent banking regulations. When global regulators introduced Basel III's Net Stable Funding Ratio (NSFR) rules, unallocated account gold was classified as a non-liquid asset, requiring banks to hold an 85% stable funding buffer. The London precious metals industry strongly protested, warning that clearing banks might exit the market. Now, tokenization technology is completing the transformation initiated by Basel III.

I have some concerns about this: the driving force behind the implementation of this technology is precisely the major banks that once vigorously defended the old system.

The vault business storing 12.5-kilogram gold bars was originally outside the FCA's regulatory scope; however, in the future, holding gold tokens will require full regulatory qualifications.

In February of this year, the UK Parliament passed a new regulatory framework for crypto assets, changing the legal environment. The FCA has since officially regulated crypto asset custody and trading platforms. Companies will have a five-month window starting from September 30 to submit qualification applications, with the entire set of regulations set to take effect in October 2027. The relevant rules are still being refined, and the FCA continues to optimize customer asset custody regulations, while lawmakers are attempting to extend traditional market exemption rules to the token space.

The underlying physical gold itself will not change; vaults, insurance, and security personnel will continue to operate as usual.

Once ownership records are transformed into token form, related businesses will immediately fall under regulatory jurisdiction. This is precisely the boundary set by regulation: the core of regulation is the statutory rights corresponding to gold. Tokens transfer ownership in a new way, so the FCA must introduce entirely new regulatory rules.

If accounting costs are compressed to nearly zero by software, value will flow directly to scarce physical assets. The barriers to entry in the London gold vault sector are extremely high, with only four clearing banks and three security transporters, and no new entrants for over a decade. Tokens will not disrupt these physical service providers; code cannot replicate the security systems of physical vaults. In fact, tokens may further enhance the importance of physical custody institutions, as every digital certificate must rely on physical custody services. Relevant companies only need to adjust their business models, shifting their profit sources from customer gold deposit services to standardized service fees for storage, auditing, and collateral support services.

The concept of gold tokenization in London has been around for a long time. Paxos and the European Clearing Bank attempted to implement it back in 2016, but the project was shut down after 13 months of operation. Now the model is feasible, with the core difference being that the leading parties have become the major clearing banks, rather than external startups forcibly pushing technological solutions.

Taking HSBC as an example, the bank has built its own system to handle all transactions, creating a closed ecosystem and independently controlling the pace of transformation. The ultimate direction of this market transformation depends on the FCA. The regulatory agency needs to make a key decision: whether to allow the gold tokens issued by HSBC to circulate outside the HSBC system. If regulation permits circulation, the market landscape will be completely rewritten; if prohibited, the old banking model will merely continue to operate under a new guise.

How do we determine whether tokenization is truly widespread? We can track the transformation process through publicly available data from the LBMA.

The LBMA publishes two sets of data: total market trading volume and clearing volume of traditional central ledgers. Once the market extensively uses tokens, the total trading volume will remain high, with investors continuously buying and selling; however, the traditional clearing volume will decline. This is because token transactions are completed with instant transfers on the blockchain, completely bypassing the traditional London clearing system.

At this stage, the trading volume of the old system remains substantial. The clearing ledger sees approximately 20 million ounces of gold change ownership daily, while about 306 million ounces of gold remain long-term stored in vaults. This means that on a daily basis, approximately every 15 ounces of gold has 1 ounce that circulates solely through paper transactions, with no physical gold moving at all.

Humanity has created mathematics, cryptography, and a global network, and after all the twists and turns, the final resting point remains the gold quietly stored in underground vaults, doesn’t it?

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