Should the Bullion Industry Embrace or Dismiss Blockchain Technology and Cryptocurrencies?

Should the Bullion Industry Embrace or Dismiss Blockchain Technology and Cryptocurrencies?

Due to the rise of bitcoin and other cryptocurrencies, blockchain technology became a global buzz word. From supply management to shipping and transportation, many projects are exploring how to harness blockchain technology to cut costs, improve efficiency, and expeditie processes.

The precious metals industry has been rather slow in looking at this technology. From gold refiners, through logistics companies to vault operators, to gold and bullion dealers, there are not many attempts to explore the advantages of this technology.

In October 2018 at the Precious Metals Investment Symposium, Joshua Rotbart, managing partner of J. Rotbart & Co., the Hong Kong based gold and other precious metals specialists, shared his insights on – why is the precious metals industry reluctant to endorse blockchain technology, what are the benefits of using the technology, and how can the bullion industry utilise this technology.

Please see Joshua’s presentation for more information.

Why are we having this discussion?

For the last 2 years I’ve witnessed the growth of crypto markets and the spread of the blockchain technology that underlies them.

I’ve also seen how the bullion industry developed a suspicious outlook of both, and that led me to wonder WHY?

  • The bullion industry is very “old school”
  • Confusion between Blockchain technology and cryptocurrencies
  • New kid on the block is getting the attention

What is Blockchain?

  • Blockchain is a technology for digitised, distributed and decentralised public ledgers.
  • A blockchain is a single, shared, tamper-evident ledger – once recorded, transactions can’t be altered.
  • All parties must give consensus for new transaction to be added to the ledger network.

What are Smart Contracts?

  • Smart contract are computer protocols – CODE.
  • They facilitate, verify, and enforce terms, negotiations or performance of a contract via execution of code.
  • Smart contracts allow the performance of credible transactions without third parties.
  • Transactions are made on a blockchain, and are therefore trackable, verifiable, and irreversible.

With smart contacts, clauses may be made partially or fully self-executing, self-enforcing, or both. Unless certain conditions can be verified digitally as being met, the contract cannot be executed.

What are this technology’s benefits?

  1. Transparency
  2. Security
  3. Traceability
  4. Speed and efficiency
  5. Reduced costs

Benefits for Supply Chain Management

  1. Fraud elimination
  2. Error reduction
  3. Inventory management improvements

Bullion Applications: Mining to Refining

#1 Traceability

For example –

Congo’s cobalt mining

  • Addresses political and economical issues.
  • Helps enforce cobalt mining industry compliance with regulations preventing child labor.

TrustChain – A platform that tracks and authenticates diamonds, precious metals and jewelry at all stages of the global supply chain, from the mine to the retailer.

Bullion Applications: Transportation

#2 Documentation Efficiency

Easy coordination of documents on a distributed ledger, make physical paperwork largely unnecessary.

For example –

TradeLens (IBM, Maersk)

promoting more efficient and secure global trade, bringing together many of the parties involved in international supply chains

Bullion Applications: Production

#3 Gold Bar Integrity, Security and Authenticity

The LBMA has issued an RFP to further strengthen gold supply chain integrity:

  • Builds on the LBMA’s Responsible Sourcing programme.
  • Proposes use of a blockchain to secure supply chain provenance.
  • Aims to minimise fraud and security breach risks.

Phase 1 will focus on kilobars & large bars.

Blockchain backed Supply Chain Technology will mitigate risks faced throughout the life cycle of a bar, and will securely record bar specific data (i.e. brand, origin, custody, location) on an inviolable platform.

Bullion Applications: Trading

#4 Speed

Financial settlements in cryptocurrencies

Financial settlements in the precious metals industry can use payments based/ oriented cryptocurrencies, such as Ripple, thus saving time and reducing costs.

Bullion Applications: Retail

#5 Accessibility

The holy grail is a gold backed token:

  • Makes the gold market accessible.
  • Easy and safe purchase of bullion.
  • A Stable cryptocurrency.

Over 30 projects are currently in development.

The Precious Metals Industry and Blockchain: A Conclusion

  • The industry is very traditional, but perceptions are in flux, and we’re at a point where key players are taking active steps towards adoption.
  • The promised benefits for reduction of fraud, errors and misinterpretations, are too great for the opportunity to be ignored.
  • The result of adoption may be unprecedented boosts in trust, credibility and efficiency.
  • Many aspects of bullion supply chains will benefit (bar tracking, inventory management etc.), others will by necessity, remain “old school”

There’s still a way to go – We need a unified set of rules and an entity to enforce. Perhaps the LBMA will lead ?…

J.Rotbart & Co