On September 14 local time, the UK's Financial Conduct Authority, or FCA, opened a consultation on the opportunities and risks of creating tokens representing gold for trading or use as collateral in wholesale markets, as well as the regulation that would be required. Gold tokenization is a method of representing ownership of physical gold held in custody with digital tokens and transferring that ownership electronically. Noting that London's over-the-counter spot gold market is the world's largest, the FCA said this approach could make gold easier to transfer and use as collateral in transactions between financial institutions, provided there is legal certainty and risk control. The review covers only products that grant ownership of physical gold, allow the gold held in custody to be verified, and have reliable redemption procedures.
A key issue is that uncertainty over whether some gold tokens qualify as collective investment schemes, or CISs, or alternative investment funds, or AIFs, could restrict investors from holding them or firms from selling them. Products that provide direct ownership of specific gold bars and do not pool them for collective management are likely to fall outside fund regulation, but fund rules could apply where multiple people share interests in a single gold bar and it is jointly managed or disposed of. The FCA is considering explaining existing rules more clearly, creating a "qualifying gold token" classification, and working with the Treasury to exempt certain gold token products or related market infrastructure from these rules. However, an exemption is only one of several options under consideration, and consideration of it is itself subject to the Treasury's discretion, so no decision has been made on whether it will be implemented. The FCA said a broader exemption should be limited to products that could be protected more effectively under a separate regulatory framework, which should cover ownership, custody of physical gold, redemption, independent verification, and investor protection in the event of insolvency. Responses are due by October 23, and the FCA plans to use the evidence submitted to determine whether guidance or a separate regulatory framework is needed.