Limitations of Tokenizing Precious Metals
For a long time, precious metals have been a haven for many investors. Gold, for instance, presents an anti-inflationary store of wealth and investment option since it’s deemed to be always appreciating. Well, that’s inarguably true, but the real problem is the accessibility and handling of the precious metal. Its high value raises significant security concerns, plus intermediaries in conventional markets always skyrocket the cost an investor has to pay for a gold bar.
Luckily, blockchain technology is carving a path that seemingly ends these problems altogether. The idea of blockchain tokenization has now extended to precious metals, and many precious metal tokens are already up for trade on decentralized platforms. It’s proving the perfect way of handling precious metals so far, but not without a share of limitations.
Read on to learn some of the current pressing concerns regarding the tokenization of precious metals but first;
What is Precious Metal Tokenization?
Precious metals tokenization is an emerging trend, one of the newest blockchain technology’s use cases. Precious metals are just one among the many asset classes that can be tokenized. So, in general, asset tokenization involves creating digital twins of tangible or intangible assets. For precious metals such as gold, it involves creating a digital form of a gold bar representing and deriving its value from a physical gold bar. The digital twins are what are commonly referred to as security tokens stored on a blockchain.
The Drawbacks of Tokenizing Precious Metals
As a concept based on blockchain technology, tokenization of precious has already gained traction due to the technology’s unprecedented capabilities. However, blockchain is still a developing technology and has a few limitations that are yet to get resolved. Precious metal tokenization inherits these problems, with the most significant being the lack of a regulatory framework.
Lack of Proper Regulatory Framework
Blockchain forms the core of security tokens with its decentralized ledger system. It eliminates intermediaries and ensures everything runs transparently and securely and that anyone can access the ledgers from any country. However, there are yet to be common regulations that would apply effectively across the various jurisdictions. Therefore, a well-defined global regulatory compliance structure is quite necessary but lacking.
Lack of Licensed Marketplaces
There needs to be a licensed marketplace for the safe trading of tokens where buyers and sellers can meet virtually and execute their exchanges. Marketplaces may be available already with active and completed transactions. However, most of them are not licensed for security tokens since it’s an emerging trend and purely based on new technology. As a result, investors may not have the confidence and incentive to trust marketplaces and use them to acquire these high-value tokens.
Additionally, requirements include security token offering (STOs) operation and management platforms that need licensing and a couple of trials and errors before fully operational.
Although blockchain technology presents itself as completely secure, cases of token loss are still rampant. In 2020 alone, blockchain hackers made away with $3.8 billion in an estimated 122 cyber-attacks. In addition, precious metals’ high value further makes the tokens suitable targets for hackers, so it isn’t easy to guarantee maximum security.
Negative Tax Implications
Precious metals traded in the conventional market attract tax depending on a country’s tax regime or the global structures. Therefore, while tokenization of the metals promotes a wider inclusion, it negatively impacts taxes. This is due to the lack of global tax structures that would apply to tokenized precious metal trades, and so governments lose on their income tax despite the wider inclusion in global precious metal trade.
Is All Lost for Precious Metal Tokenization?
Despite the challenges, all is not lost for the precious metals tokenization space. It’s a normal occurrence for a new trend, and it will most probably find its way through, just like the cryptocurrency space. Developers, regulators, and governments will only have to join forces and establish the necessary regulatory frameworks and laws that will govern precious metals tokenization and trade. Besides, more countries continue to issue their regulation on blockchain-based digital assets as the industry continues to record expansive growth.
Moreover, blockchain is already making steps in some of its major limitations. For instance, the number of blockchain-related hacks dropped in 2020 for the first time in five years regarding blockchain security. The 122 attacks represented an 8% drop from the figures recorded in 2019. In addition, most crypto tokens are irrecoverable upon loss, but the precious physical metal would remain if the tokens get hacked.
The precious metals tokenization concept is quite impactful in terms of accessibility and transfer of ownership of these assets. The benefits outweigh the limitations, and perhaps among the reasons why the idea is burgeoning. It has already gained much traction in other industries, including sports, music, real estate, and the financial sector. However, some of the existing challenges need appropriate redress for the concept to get fully optimized. It could take some time as the concept is still in its infancy, but its reception creates high hopes.