The Royal Mint is to offer a new way to invest in gold using the technology behind Bitcoin, the digital currency, launching in 2017.
This marriage of arguably the world’s oldest asset with its most futuristic technology is said to offer significant benefits to private investors – if they can understand how it works.
The following Q&A should help.
What exactly is the Royal Mint going to offer?
It is already possible to buy and sell gold online – without the trouble of taking delivery and storing the precious metal – but investors currently need to use specialist websites such as BullionVault.
The Royal Mint’s new service, by contrast, is intended to allow investors to trade its gold, held in the Mint’s vaults, at any hour of the day or night via their existing investment shop.
No such firms are on board yet, but a spokesman for the Mint confirmed that it had mainstream companies such as Hargreaves Lansdown in mind as partners for the new service.
The Mint is working with an American firm, CME Group, to develop and run the new service, which will also be available to fund managers and other third parties.
The Royal Mint does already offer gold trading services. Its gold can be held in Sipps (self-invested pensions) as of this year, although it is not an instant process.
Another Mint service, “Signature Gold”, allows investors to buy fractions of a gold bar stored in its vaults, again offering round-the-clock trading, for a 0.5pc annual management fee.
However, this is done via the Royal Mint’s website, not third-party investment shops.
Why is ‘Bitcoin’ technology involved?
For large-scale trading to be possible on multiple platforms, a secure digital record of ownership is needed. This is where the new technology (called “blockchain”) comes in.
Essentially, it is an online ledger of transactions, updated cryptographically, whose entries cannot be deleted or edited once added.
Copies of the ledger are shared over the internet by multiple parties. For the record of ownership to be lost, all copies would need to be deleted.
Charlie Morris, a multi-asset investment manager at Newscape Capital and an expert on gold trading, said: “What this technology can do is exist in an open world. I think firms such as BullionVault and GoldMoney are great, but their system works beautifully in a closed circuit. Provided that you trust the organisation, which people do, that’s fine.
“But with blockchain technology, someone can trade gold here and in Japan, with it sitting in the Royal Mint’s vaults, and you don’t both need accounts with the same provider.”
Cryptographic ownership records can be either public or private.
Public systems operate on a “peer-to-peer” basis. Anyone in the world can read the ledger, submit transactions for verification, and be involved in the verification process.
In Bitcoin’s case, there are thousands of “nodes”, operated by market participants. There is no central institution or middle man.
The larger the number of nodes, the greater the level of security. Enormous computing power is required to verify each transaction and add it to the ledger.
Private blockchains have some kind of limited access and central control. This could mean limitations on who can read the ledger, be involved in verifying additions to it, and write on to it.
A smaller number of “trusted” participants such as financial institutions makes transactions quicker and cheaper.
Arguably a private system of this type is little different from existing record keeping tools.
However, a fully open system with anonymous participants, such as Bitcoin’s, can cause regulatory headaches.
The Royal Mint and CME have yet to decide who will have access to their ledger.
A Mint spokesman said the new technology was “a very efficient mechanism for tracking ownership and transfer”.
How is this different from a gold ETF?
From a practical point of view, the Royal Mint’s offering appears somewhat similar to an exchange-traded fund such as ETF Securities Physical Gold.
Such ETFs are funds that own gold bullion and issue shares that allow investors, in effect, to own a fraction of their gold assets.
The funds appoint independent custodians – something that Mr Morris said was important for trust – and hold their gold in secure vaults.
ETFs can be bought via stockbrokers and investment shops and held in Isas and Sipps. However, investors are buying shares in the ETF, whereas the Royal Mint is offering direct gold ownership.
Whether there will be significant security and efficiency gains from the Royal Mint’s use of the new cryptographic technology will depend on its exact implementation.
One practical benefit is that trading will be available 24 hours a day, 365 days a year whereas dealing in ETFs is possible only while the stock market is open.
How much will the Royal Mint charge?
The Mint will not charge storage fees, but there will be transaction costs. For the gold itself, pricing will occur on the trading platform and be subject to supply and demand.
A Mint spokesman said: “It makes sense that Royal Mint gold, which represents direct ownership of physical gold, would price somewhere around the ‘spot’ price – but ultimately the market will decide this.”
Will other assets be traded via this new technology in future?
Experts are divided, although private cryptographic ledgers are likely to become more widely used in financial services.
Earlier this year Santander became the first high-street bank to use such technology in international money transfers. It’s even possible that, one day, trading in shares will follow suit.
Mr Morris said: “If I put my future hat on, I think the whole world goes this way, and gold is the experiment. Gold is simple – there’s much more complexity in shares, and the entire system isn’t ready to be shifted yet.”