The tokenization of securities and commodities has long been slated as one of blockchain technology’s most important use cases. However, the development of the tokenization ecosystem has taken time–regulators and financial institutions have been slow to adopt, while innovators have struggled to gain traction in legacy systems.
Still, there has been progress. Recently, Finance Magnates spoke with Jon Deane, chief executive of Australia-based physical commodity digitization firm Infinigold, about the trend of tokenization in financial markets and institutions, and how technology companies are working continuously to build systems and products that have the potential to disrupt the market.
Prior to joining Infinigold as chief executive officer, Deane had an extensive background in the commodities space. He spent nearly ten years at JPMorgan as a managing director and as the head of commodities trading in the Asia Pacific region. After that, he spent nearly two years as the chief executive of TCM Capital, a global, diversified asset manager focused on distributed ledger technologies (DLT).
During his last several years working in traditional financial spheres, Jon said that he “saw the writing on the wall [pointing to] where I thought these markets could go.”
”You’re seeing a large number of technology companies also moving towards the banking space”
In other words, “I believe there’s a large application for both the tokenized and digital certificate side of things for the commodities–how they can revolutionize what really hasn’t evolved for the better part of a hundred years: how they actually, physically transact with these underlying assets,” Jon explained.
He said that this is somewhat analogous to the ways that tech companies are increasingly making movements to offer financial services to their users and customers: “[…] You’re seeing a large number of technology companies also moving towards the banking space and the traditional services they offer, but doing it much more efficiently than the banks can do, because for a lot of these big financial institutions,” making operational changes “is a lot like trying to service a 747 in the air.”
Therefore, in the intermediary space, “the technology is now enabling us to truly disrupt the intermediary [status quo]. And you can look not just to the banks” to see examples of this: “you can look at the ETF providers and the services they provide to exchanges, and how they wrap certain underlying assets (and effectively put management fees on top of that) and what technology can do to disrupt this industry.”
What is Infinigold?
This, according to Jon, is where Infinigold comes into the picture: “Infinigold is a digital trade house where we look to digitize physical commodities on a central ledger-basis in a cryptographically-secured fashion,” Jon explained. “The first client we have is the Perth Mint, which is owned by the West Australian government.”
“We take those digital certificates, and we tokenize them, and we put them on the blockchain for wider distribution to enable people to transact in a physical commodity,” he said. These tokens are available for “investors, for physical users, for the supply chain, as well as from a financing standpoint.”
Essentially, “we provide a gateway between the blockchain and back to that registry so that people can actually take physical delivery of the underlying commodity if they need it, or there is always an ‘out’ from a pricing standpoint, meaning that the provider of the physical [commodity] provides a two-way price in fiat currency, and they don’t have to be overly reliant on the actual crypto exchanges for that two-way pricing.”
In collaboration with The Perth Mint InfiniGold has released a digitised form of gold based on digital gold certificates (a form of cryptocurrency within a private system). These certificates allow institutions to offer investors to trade and hold physical gold digitally 24/7. pic.twitter.com/9vNQJ12yS3
— The Perth Mint (@perthmint) January 25, 2018
Jon said that the partnership with the Perth Mint, and the resulting formation of the Perth Mint Gold Token (PMGT), a gold-backed stablecoin, is particularly significant because it’s “the only government-backed token on the blockchain.”
“[It] was a pretty big step to make,” he explained. “We were audited by PriceWaterhouseCoopers to get that process done, and the hoops you had to jump through to work with someone like the Perth Mint–rightly so, because of who they are as a government organization–it’s very important that you ‘tick all the boxes’.”
Why the stablecoin “gold rush”?
While PMGT may well be the only government-backed gold stablecoin, it certainly isn’t the only gold stablecoin on the market: in fact, there has been a surge of these coins: a recent report by Bitcoin.com found that there are at least 77 of these gold-backed projects currently on the books in spite of the fact that at least 30 similar projects have failed over the course of the last ten years.
We asked Jon what he believes the reason for this surge is because of a longstanding imbalance of power in the stablecoin ecosystem: specifically, the prevalence of Tether Dollars (USDT), which make up the vast majority of stablecoin usage. Tether has also recently launched gold-backed stablecoin.
“USDT is one of the most centralized ecosystems that you can operate in, being that effectively, the federal reserve controls the supply of US dollars.”
“So, gold, being a historical store of value–and a truly decentralized asset (meaning that no centralized government controls the supply of gold)–is a much better alternative if you’re looking for a stable token.”
Stablecoins are a rather old idea. Liberty Reserve and e-gold (and many lesser-known others) were effectively stablecoins. However the current crop has far surpassed their predecessors
Don’t Let Your Clients Fall Behind with Delayed DataGo to article >>
— nic carter (@nic__carter) January 26, 2020
“I think that a lot of people saw this as an obvious solution to having a stable token versus some of the other crypto assets out there. A lot of them have, obviously, failed–and our own token needs to prove its worth and whether it can survive in the crypto ecosystem.”
Jon said that however, it largely comes down to “who is backing these tokens.”
For example, “there’s a number of allocated gold tokens out there, and there’s a number of unallocated gold tokens out there. All of them have pros and cons; a lot of them don’t have very good vaulting audits around how much gold is actually sitting there.”
“Others have issues around scalability,” he continued. “Allocated gold is a scalable issue…if you want to think about institutional adoption, you can’t scale allocated. You can scale unallocated.”
”The whole space is being revolutionized, and it’s happening at a pretty rapid pace.”
Jon also pointed to a greater trend of partnerships between established financial institutions and tech companies.
“I think that we’re actually starting to see the fruits of a lot of that work being done over the better part of a decade now starting to evolve–you’re starting to see a large number of financial institutions” making technological advances, particularly in relation to blockchain.
“Pretty much every bank on Wall Street’s doing stuff, pretty much every stock exchange is doing stuff; commodity traders and traders are all actively trying to partner and get involved,” he said. “The whole space is being revolutionized, and it’s happening at a pretty rapid pace.”
Jon pointed to State Street’s partnership with cryptocurrency exchange Gemini as one example of this: “they’re effectively taking data feeds from Gemini, which is a big decision for a financial institution to make.”
“Or, when you go further down the chain, you’re seeing a number of smaller banks and institutions trying to either develop relationships at the neo-banking level (obviously, that’s the retail offering), or just purely from a technology provider standpoint.”
“I feel [that] technology companies have got the upper hand now, and that at the negotiating table, it’s getting harder and harder for a lot of these financial institutions to continue down their current paths.”
”Tere’s still a long way to go”
However, at the same time “there’s still a long way to go,” Jon said. “As much as I say that there are a lot of these opportunities arising for these banks and other financial institutions, a huge amount of infrastructure needs to be built to support it.”
“So, if you think about a simple corporate company, which may transact in [something like] soybeans, and they produce meal and oil and sell that down the chain–now, in theory, we could provide a solution in soybeans: we could enable title transfer, we could facilitate the financing of that right of the title being moved on a trade finance vehicle.”
“However, banking relationships are inherently deep,” he continued. “So, while they may be providing a line of credit (for one thing), they’re also providing all these other services–and all these other services are generally under-provided if they’re doing the other thing further up the chain.”
In other words, “if the corporate client pulls out one of those other components, they lose all these other factors as well.”
“So, while a lot of these technology companies are focusing on just one single service, we need to be able to offer the whole chain of services to truly disrupt the market,” Jon said. “We’re definitely not there yet.”
“And that’s the same with institutional adoption of crypto,” he continued. “Everyone talks about Bitcoin being adopted by institutional investors, and I struggle to see it right now because we don’t have the plumbing there yet for true adoption at the institutional level.”
Jon explained that “it’s not just about brokers. It’s about lending capacity–whether it could go to a private bank that gives some sort of loan-to-value (LTV) of it, similar to traditional currency.”
Right now, “if you get a private account [and attempt] to get 80 to 90 percent LTV on Bitcoin, the answer’s ‘no’. The reality is that they probably wouldn’t offer you any lending–so, why would you chew up all your capital [by] putting into a standalone asset like Bitcoin when you could put your money into a private bank?”
After all, “the returns on [a different] asset may not be as good as Bitcoin, however, because you have all these other services that operate around it, it’s a much more appealing product to have.”