When it comes to trading of commodities, there are few key issues like holding, exchanging and transporting the product. Major exchanges stand as an authenticator between the buyers and sellers, ensuring the timely transfer of money and goods. While this is the standard procedure, it takes a lot of time and effort to ensure that the contract execution is appropriate. When it comes to spot exchanges this process becomes highly difficult to handle or monitor. This is consequential to the fact that spot exchanges require immediate transfer of goods/contracts and keeping a track of the same in real-time makes it difficult.
When it comes to precious metals like Gold, it becomes even more complicated due to security concerns. Royal Mint of England and CME Group came together over an initiative to reduce the hassle in this process. For the same purpose they have employed blockchain technology. Let’s look into how they plan to execute the same:
Gold Spot Trading:
A spot trade is the purchase or sale of a foreign currency, financial instrument, or commodity for immediate delivery. Foreign exchange spot contracts are the most common and are usually for delivery in two business days, while most other financial instruments settle the next business day. The spot foreign exchange market trades electronically around the world. It is the world’s largest market, with over $5 trillion traded daily; its size dwarfs the interest rate and commodity markets. With such heavy volumes, it becomes difficult to keep a track of spot exchanges accurately.
The Blockchain initiative:
The Royal Mint and CME are planning to build a gold market using nascent blockchain technology. This will perceptibly transform the way market participants will be able to trade, execute and settle gold. The new product will launch in 2017 and will see the state-owned Royal Mint issue a digitized gold offering called Royal Mint Gold (RMG). This will act as a digital record of ownership for gold which is stored at its highly-secure on-site bullion vault storage facility. CME will develop, implement and operate the product’s digital trading platform. This platform is to provide a new service that will offer an easier, cost-effective and cryptographically secure alternative to buying, holding and trading spot gold.
Digital Trading Platform:
CME will launch the digital trading platform which will operate 24 hours a day, 365 days a year. The traditional physical spot cost model for investing in gold involves management fees and ongoing storage charges levied. These RMGs will offer ownership of the underlying gold with the option for conversion to physical gold by The Royal Mint with zero storage cost. The initial amount of RMG at launch could be worth up to $1 billion of gold. How this initiative would transform other commodities markets is to be seen.