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Improving Gold’s Physical and Digital Traceability

By Abhinav Ramesh, Founder, Chainflux

Published on January 12, 2021

Regulators worldwide have long searched for ways to curb unlawful activities involving gold. The previous metal can be traded anonymously, and transactions are difficult to trace and verify. This is a growing concern as bullion is also increasingly being used by mutual funds, ETFs, e-gold players that offer gold-backed securities. Without a robust traceability system, gold can easily be sumggled or used for activites such as financing terrorism.

Traceability involves maintaining data on source, authenticity of the bullion bar till it is melted to make jewellery. However, there are currently few end-to-end traceability solutions for gold bullion, except for internal systems being adopted by refiners and exchanges. There are standards that are to be followed such as the Bank for International Settlements (BIS) standard in India for refined gold, Organisation for Economic Co-operation and Development (OECD) compliance that is required for proper sourcing, and of course the entire list of standards set out by the London Bullion Market Association (LBMA).

Using blockchain technology, a tamper-proof and auditable ledger can be created which would provide complete traceability of gold across the value chain. Companies in several countries have also experimented with using a blockchain system for traceability, including Tradewinds in Canada, Axedras in Switzerland, Truegold in Australia, and in India, where the India Gold Policy Centre and National Stock Exchange is working with Chainflux on a traceability solution. The ideal traceability solution would be to combine the physical bullion with the digital blockchain solution in a non-tamperable manner. This can be done through injecting a specialised material into the molten gold during the refining process, like what is being done at Perth Mint with Security Matters as part of the TrueGold initiative. This, however, has yet to be tested as the solution is slated to launch in the first quarter of 2021. It remains to be seen how the gold will be affected when it is converted to an alloy for producing jewellery.

The other method, which has been tested further in the market with other commodities, is to attach an NFC tag or an RFID chip to the finished bullion. This tag or chip can be attached to the packaging of the bullion bar in such a manner that if the packaging is damaged, the link to the blockchain platform is broken, and anyone that scans the tag gets an error. This will determine if the bar has been tampered with. The blockchain serves as a data layer and ensures that once data is entered, it cannot be modified or tampered. The RFID and NFC tag can also be augmented using a system that is able to detect, through consumer-grade LiDAR AI technology, as to whether the bars produced by refiners identically matches the bars that are present with any entity to be able to verify fake bars. This again is still experimental technology and has not yet been proven in the market.

Blockchain can serve as a real time data feed to both monetary and securities regulators, on the movement of finished bullion bars. Regulators would be “nodes” in the blockchain network, and would be able to see a real-time view of authentic, OECD-compliant bullion bars within the country. This traceability system helps to identify unmarked/smuggled/fake bars that are present with any registered entity. It would make it more difficult to bring smuggled/fake bars into the system, though it would not altogether eliminate it. A traceability system would also require all government bodies and regulators involved in the gold market to adopt a single platform to view and add data regarding bar movement. The software and the hardware aspects also have to be standardised for this system to be implemented on a country-wide scale.

The potential benefits of this traceability system for key stakeholders include:

  • Jewellers: Show end customers the source of the product that they are buying and offer a high level of assurance around the weight and purity/fineness of jewellery. Millennial customers are increasingly on the lookout for sustainably produced and fair trade commodities, which can be assured through full traceability of precious stones and the precious metals used for jewellery creation.
  • Refiners: Ease of bar authenticity and source compliance.
  • Banks: Provide banks a strong case for bullion banking as well as provide credit to the gold trade.
  • Regulators: Ensure accountability for every bullion bar, coin, biscuit, and gold jewellery by providing a real time view of all gold trades.
  • Logistics providers: As long as logistics providers ensure all bullion moving in and out of the vaults are part of the blockchain traceability system, full traceability and security can be maintained.

Traceability for bullion benefits all participants in the gold supply chain. However, for the traceability solution to be fully functioning and effective, key participants need to be part of the blockchain platform. With the increasing digitalisation of gold, the requirement for traceability becomes all the more important moving forward.

ABHINAV RAMESH is the founder of Chainflux, a blockchain products firm that is working with India’s National Stock Exchange and the India Gold Policy Centre to bring about end-to-end traceability for gold. He was formerly a management consultant at EY, and a fellow at India’s Council of Scientific and Industrial Research (CSIR).