UK actors making noise about tokenizing gold and recognizing gold as HQLA

pmbug said:

I see the quoted tweet making the rounds today. I've got a few notes/comments:

The PRA is the Prudential Regulation Authority - a UK financial services regulatory body. It published a final policy on custody and vaulting of physical precious metals back in May.

In the quoted tweet, the LBMA responded to a specific proposal by the PRA (and BoE?) to allow banks to shore up their balance sheets with BoE held gold (in LBMA vaults). The proposal is linked in a reply below). Essentially, they are concerned about the public's ability to draw down a bank's liquidity in the age of digital currency technology (ala the Silicon Valley Bank run). The LBMA is advocating for the PRA to consider classifying BoE gold as a HQLA (high quality liquid asset) as part of their solution (it is not currently present in the proposal that I saw when skimming through it).

The LBMA has been petitioning the BIS' Basel Committee for over a year now to classify gold as a HQLA in the Basel III framework and to date the Basel Committee has not been agreeable AFAIK (see link in reply below for details).

The PRA proposal would set the rules for banks in the UK. The Basel III framework is used by banks globally. If the PRA accepted the LBMA's recommendation, it remains to be seen whether it would nudge the Basel Committee to reconsider their stance. It's also possible that other nations would follow the PRA/BoE's lead even if the Basel Committee remains on the sidelines.

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Executive summary

1.1 We are seeking evidence on whether tokenisation could improve the way gold is traded, transferred, pledged and held in UK markets, while maintaining high standards of market integrity and consumer protection.

1.2 This follows a broader Call for Input we published in May with the Bank of England on “The future of tokenisation: A joint vision from the authorities for UK wholesale financial markets“. Responses to that paper mentioned gold, given the international strength of the London spot gold trading market, prompting us to seek more targeted views on tokenised gold.

1.3 Gold tokenisation could make gold easier to transfer and use across markets, particularly as wholesale collateral. It may also support new forms of retail investment and product innovation. As interest in tokenised assets grows, we want to understand whether tokenisation could strengthen the efficiency and competitiveness of UK wholesale markets while preserving the strengths of London’s existing gold-market infrastructure.
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LBMA supports further development of tokenised gold where it can improve the efficiency and usability of the Loco London market, while preserving the integrity, liquidity and resilience of the market. The objective should be to make trusted physical gold more usable within modern financial markets, rather than to promote tokenisation as an end in itself.

Member feedback indicates that collateral mobility and settlement are the clearest areas in which tokenisation may provide additional wholesale utility, although views differ on the scale and pace of the opportunity. Tokenisation may also support more efficient transfer of ownership, interoperability with wider financial-market infrastructure and, where appropriately designed, improved links between digital records and information on the underlying gold. Any benefits should be assessed against the efficiency and resilience of existing Loco London arrangements.

Confidence in tokenised gold will ultimately depend on the integrity of the underlying physical gold. Tokenised arrangements should build on the standards and safeguards that underpin confidence in the existing Loco London market, rather than create a parallel framework for the underlying physical asset. Appropriate controls should ensure that digital records remain aligned with the underlying gold and that existing encumbrances or conflicting claims can be identified. Tokenisation should also complement existing market infrastructure and liquidity, avoiding unnecessary fragmentation or disconnected pools of liquidity.

Interoperability and regulatory certainty will be central to institutional adoption. Common or compatible market-led standards can help tokenised gold interact with existing Loco London and wider financial-market infrastructure. Regulatory treatment should reflect the underlying rights and risks: where these are equivalent, tokenised and non-tokenised gold should in principle receive equivalent regulatory and prudential treatment, with additional requirements where tokenisation introduces new risks. This includes providing sufficient certainty over whether particular tokenised gold arrangements fall within the collective investment scheme (CIS) or alternative investment fund (AIF) regimes.

LBMA considers that the immediate regulatory priorities are therefore to provide greater certainty on CIS/AIF treatment, prudential treatment, the application of the Financial Collateral Arrangements Regulations to gold and the wider regulatory classification of different token structures. Guidance should be used where it can provide sufficient certainty, with targeted regulatory or legislative change considered where the existing framework itself creates a barrier. A bespoke regime should be considered only where the relevant risks cannot adequately be addressed through existing frameworks and targeted changes.
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