HSBC adds fuel to tokenization fire with gold-focused offering

London-based financial giant HSBC is trying its hand at gold tokenization.

The bank launched tokenized ownership of physical gold held in its London vault on Wednesday, noting its use of distributed ledger technology (DLT) to trade the assets.

The approach “generates a permissioned digital representation of clients’ physical gold holdings,” the company said in a news release. One token on HSBC’s gold tokenization platform is equivalent to 0.001 troy ounce.

Tokenized physical gold can be traded between HSBC and institutional investors through the HSBC Evolve platform.

HSBC is not new to using the blockchain. The company teamed up with Wells Fargo in December 2021 to use a shared settlement ledger to process transactions in US dollars, Canadian dollars, Euros and British pound sterling. It revealed its intention in November 2022 to launch tokenization platform HSBC Orion — on which institutions can issue digital bonds.

“In addition to demand for native digital assets, we are seeing an appetite for tokenization solutions that can maintain a link to specific real-world use cases, such as gold,” John O’Neill, HSBC’s head of digital assets strategy, markets and securities services, said in a statement.

The launch comes as the tokenization space continues to evolve — and as macro factors have initiated a “flight to quality” for some investors, which may include gold.

Gold is the second-most tokenized asset in terms of market capitalization, following USD, according to an August report by RedStone Chaos Labs.

“With growing attention on gold due to inflationary concerns, tokenized gold is in a good position to take an important role in the transition to on-chain finance,” the companies state in the study.

Tether Gold (AUT) and PAX Gold (PAXG) dominate the tokenized gold category with roughly market capitalizations of about $490 million and $480 million, respectively, CoinGecko data shows.

Paxos says it backs PAXG tokens with gold stored in London Bullion Market Association vaults. Tether Gold buys London Good Delivery gold from Switzerland and stores it in a vault there, according to its white paper.

Tokenized gold is also offered on WisdomTree’s “blockchain-enabled” consumer app, which launched in July.

HSBC’s gold tokenization launch is a step toward ultimately creating “a world-leading set of digital asset capabilities,” O’Neill added in the Wednesday statement.

The current high yield environment has more recently led to digitizing financial assets like sovereign bonds, money market funds and repurchase agreements, Coinbase institutional research head David Duong and analyst David Han wrote in a Monday blog post.

They added: “We believe this could be a vital use case for traditional financial players and become a major part of the new crypto market cycle, though full implementation may take another [one to two] years.”

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