In recent years dozens of ambitious blockchain-based gold projects have attempted to make the cumbersome metal easier to trade. But until now, none of these projects have been authorized by regulators. Few have found any traction at all.
With approval from the New York State Department of Financial Services (NYDFS), a new gold-backed stablecoin from Paxos called Pax Gold has been given an official entry into the cryptocurrency ecosystem, and now looks set to gain traction where so many before have failed.
The gold-backed token graveyard
Projects promising to deliver stablecoins backed by metals proliferated in the ICO boom of 2017, but like many other ill-fated token offerings, they failed to deliver on their ambitions.
A recent report from Blockdata found that two-thirds of all defunct stablecoin projects were designed to be backed by gold reserves.
The failed schemes range from suspect startups like Doradocoin — which claimed to be tokenizing the gold from a Chilean mine, to high-profile projects like Royal Mint Gold (RMG) — which was frozen after U.S. exchange group CME refused to list the token and the British government vetoed the plans.
These more recent failures follow a long history of unsuccessful attempts to digitize gold that date back to the early days of the internet.
Pioneering digital currency e-gold even predates PayPal. The token was launched in 1996 and used by millions of people around the world before the founder was eventually arrested and charged with money laundering and conspiracy to operate an unlicensed money transmitting service.
Even in the present, coins linked to commodities are still facing an uphill battle with regulators. As Gabriel Escalona from Bitcoin and gold exchange Vaultoro told Brave New Coin, gold-backed token projects have been plagued with problems.
These include concerns over the potential for classification as a security, and difficulties creating a legally compliant fee structure that reconciles gold's operational costs with the world of cryptocurrency.
"I would say that the failures are due to a lack of knowledge about the gold industry and thus the inability to create sustainable business models," said Escalona to Brave New Coin. "Most projects have complex two-token economies and a lack of transparency, and these projects struggle to bring their solutions to market and to get listed by exchanges either because of regulations or lack of reputation."
The new generation of gold tokens
Leaving this litter of failed coins behind, Paxos is leading a new generation of stablecoin projects that are working directly with regulators.
Though well-known for creating the stablecoin PAX USD, Paxos also has experience with commodities and has been processing precious metals on its post-trade platform since July 2018.
Pax Gold, claims CEO Charles Cascarilla, overcomes the challenges faced by previous gold tokens and successfully reconciles the demands of gold with the world of cryptocurrency.
High storage fees from holding the metal in a London vault are passed on to customers by charging a premium against the spot price. Customers also pay a "tokenization" fee at the time of purchase, and a transfer fee of 0.02 percent to buy or sell tokens on a blockchain network.
This model has already proven popular with lenders, and the token will be accepted as collateral by Salt Lending and Nexo.
Hoping to replicate the success of Paxos, bitcoin to gold exchange Vaultoro is close to releasing its own regulated gold token. The exchange has been negotiating a legal framework to roll out VGold — which will reportedly be Europe's first compliant gold coin when it is released later this year.
Elsewhere, Digix — the maker of the gold stablecoin Digix Gold Token (DGX) — is also cozying up to regulators. CEO Kai C. Chng told Brave New Coin that the firm has "sought and obtained clarity" from regulators in Singapore for its gold-backed tokens.
Despite the regulatory progress, however, U.S. citizens could still be waiting some time to access gold-backed tokens. VGold is only expected to roll out to U.S. exchanges after meeting with success in Europe, and Pax Gold tokens will only initially be available on non-U.S. exchanges.